Across the country as well as throughout the Greater Los Angeles area, the commercial real estate industry has seen a number of shifts in the office market throughout the last several quarters. To learn more about some of the trends and challenges and how they will take shape throughout the rest of the year, The Registry talked to Executive Managing Director of Brokerage & Leasing at JLL Kevin Bender.
Leasing has been difficult in 2022, but what trends have emerged that are of note?
There are a few trends that we are seeing in how employees utilize workspace today and new and unique ways of building space to draw people in. However, the biggest trend is that organizations across industry types agree that mobility is here to stay, and it should be highly considered whether a business is determining design modifications and solutions for current space or building a new one. Also, it is key to not only have a space that brings people together but takes advantage of employee attendance by encouraging collaboration. Essentially, no one wants to develop an office space where employees sit at their desks on calls all day, because that work can be done from home. To keep that from happening, the office will require workspaces dedicated to collaboration and technology that fuels in-person connection.
What do you think will happen in 2023 in terms of leasing rates? Will landlords succumb to growing vacancies and cut more deals than they did in 2022?
It will certainly be a bifurcated market. In Los Angeles County, we have markets that are very strong like Century City and others that are struggling like Downtown Los Angeles. Regardless, we will see a divide in demand and lease rates because there will continue to be a flight to quality and demand for premier buildings. For B & C class buildings, we will see greater softening even in the markets that are strong. For lease rates, I don’t think we will see dramatic changes. However, landlords will be hyper-focused on getting deals done given the lower velocity of transactions. If they have a quality tenant, they will want to take advantage of securing that deal.
What characterizes a successful leasing deal these days, and will that evolve in 2023?
A successful deal is always one that gets done, and, in today’s market, that may look different. But the reality is that there are still companies making short-term decisions. While not all businesses are making large investments to alter their space, most will continue to make temporary extensions while trying to understand what the new world looks like. On the tenant side, achieving flexibility for clients helps buy them time so they can determine the best solution for their business going forward – and this is considered a success. In other cases where clients know exactly how they need to rework their space, helping a client achieve their vision and bring people back is what success looks like. I think we’ll continue to see examples of both as we move into 2023.
What are you seeing with renewals? Are companies still shrinking their footprints, and what is affecting their decisions?
We have seen different approaches to renewals rather than a common trend. For example, some companies have renewed and expanded; others renewed, and did not touch their space, while some made great investments to right-size their space. What affected decisions was whether a business had their arms around employee needs and design solutions and if they were willing and ready to make the investment in their space.
What surprised you the most over the last 12 to 18 months? Do you think that trend will continue into 2023 and beyond?
What will be interesting to see in 2023 is how tenants and landlords continue to transform space and integrate technology to meet new ways of working while also navigating a slowing economy and constraints that landlords will face regarding debt, equity, and interest rates. For some time, the user was challenged with deciding what they were going to do. Now, landlords and users will feel pressure on both sides of the equation trying to work through transactions together.
How did 2022 end for you and your firm? Was it as expected or were there some surprises along the way, too?
There were certainly some surprises. Overall, we’re seeing some slowing towards the end of 2022 – which was not unexpected – but also not what we predicted at the beginning of the year. It is going to be interesting to see what the first and second quarters look like as we enter 2023. In the last two quarters of this year, a lot of companies and investors sat on the sidelines, paused, and allowed for the markets to settle in. However, early next year we expect to see a lot of people reengage and become active. How quickly interest rates and inflation impacted everyone earlier this year is also how quickly the market has settled down in Q3 and Q4 of 2022.
As you look at the market dynamics in 2023, what do you think will be the most significant things that will define the industry in the coming year?
I think what is going to be the most challenging is that many landlords are now feeling pressure from interest rate hikes. If landlords have not secured long-term debt – even if they are in a stable building – their debt has become more expensive and may impact concessions. So, for tenants who have been working through their decision-making process, if they become capable or willing to make those investments in 2023, the overall cost may change because concession packages from landlords may have changed. With that said, it is going to be interesting to see how those pressures affect transactions and being able to support companies with building, designing, and bringing to market new space for their business and employees.
Is that worrisome? Why or why not?
Yes, especially given there are more factors now. What is worrisome is a lot of users have been holding off on making decisions because the market has allowed them to, and the market has been working in a way that they haven’t felt the pressure to move quickly. That patience has allowed businesses time to gather more data on what the best long-term solution will be. And now that window is potentially closing quickly. I think that becomes worrisome for users who have not yet become comfortable or have not had the chance to decide what they want or how they want to modify their space for the future.
What opportunities do you see in the coming year and how are you and JLL preparing for the year ahead?
There’s certainly going to be opportunities for tenants to take advantage of some softening in their markets from a negotiation standpoint. We are preparing for that with our clients and educating them on their options, changes in the marketplace and how we can use our complete platform to support them with negotiations, buildouts, and relocations. For JLL, our full-service model is our greatest advantage. It allows us to support clients no matter what decision they make for their future. And I think that is exactly what clients are looking for. I think a year from now we will be talking about how diverse transactions have been and how solutions for clients came from conversions with landlords in different types of buildings, from taking advantage of other tenant spaces and from utilizing our internal network to support and create unique deals. Our holistic and creative approach is what we will be promoting more than anything in 2023.
A year from now, what do you think we’ll be talking about?
At JLL, we will be talking about how our full-service platform supported clients and helped them make informative and future-proof decisions. More than ever, businesses will require partners with keen market intelligence, understanding of construction costs, workplace design experience, negotiation skills and leasing and debt equity expertise to result in the best transaction.
