This is the new unofficial mantra of the real estate industry.

Here’s why:

1. Interest Rates

The Federal Reserve has effectively put the breaks on our inflation (and economy) and may have just pulled off the “soft landing” with the stock market looking reasonably healthy. But higher interest rates impact affordability and many buyers are sitting on the sidelines until the current rates become “normal” or they see a rate or price improvement that gives them a reason to act. Either way, I see the majority of tenants/buyers waiting until 2025 to get in the game and start making long-term decisions like signing a 7-year lease or buying office buildings.

2. Navigating Economic Uncertainty

The softening economy, job market, and potential recession have business leaders and employees being cautious about big real estate decisions.

3. Looking Ahead to the 2024 Presidential Election

The presidential contest has a unique knack for stirring up conflict and uncertainty that permeates our society. The potential policy shifts that a new administration could bring hold the power to substantially impact businesses. Consequently, many organizations find themselves in a temporary holding pattern, observing the election’s outcome before charting their course of action. Once a decision is reached at the polls, the economy and bigger real estate decisions are set back into motion.

4. Expectations

Buyer and seller do not see values the same way right now. Sellers/Landlords still have recent memories of their record-high property valuations and are not ready to let that dream die so soon. Properties listed at prices based on Cap rates of 5% don’t make any sense when money costs 7.5% to borrow. Buyers/Tenants are looking for a price that factors in the higher borrowing costs and vacancy in the market. This gap in expectations means fewer transactions getting done.

5. Slow Return to Work

Covid sent everyone home with a laptop and the way we use office space has shifted forever. The return to the office with hybrid schedules has been sluggish at best. The return to the office is going to need to be led by the big companies establishing the new work normal. I believe office occupancy will improve over time but will never quite be the same. (Those leasing office space will find sublease discounts galore!)

Amidst an environment of uncertainty, buyers and tenants lean towards indecision, deliberate contemplation, or short-term decisions. For those in the real estate industry, the wise path appears to be one of resilience and patience, with a focus on navigating to the promising horizon of 2025.

Survive until ’25, yall!

We’ve noticed a growing trend toward short-term leases. It seems that more and more tenants are requesting one-year terms when three to five years used to be the norm. While the current economic uncertainty is certainly a factor, we believe there’s a larger societal shift at play.

We’re living in an age where on-demand services like Netflix, Airbnb, Amazon Prime, and Uber are programming us to think short-term. We’re becoming accustomed to the idea that we can have whatever we want, whenever we want it. This mindset is starting to spill over into our business decisions, and it’s not very compatible with the majority of the existing office leasing inventory. Most office space is designed, priced, and marketed for long-term commitments (5 or more years) and stable cash flow for landlords. Some owners are leaning into this emerging trend with move-in-ready suites, shorter terms, and simplified lease forms, but I think the demand for flexibility and a fast, streamlined leasing process is far outstripping supply.

The recent poor financial performance of tech companies is giving corporate leaders a reason to bring employees back to the office… even if just for a couple of days a week.

Everyone who comes into the office will expect their “own desk” so I don’t think office sizes can change that much. The reduction in office size will be from scaled-back headcount and some permanent remote employees that don’t need an office presence.

Read more at this article on Costar

 

The best strategy for office landlords with vacancies is to speculatively build out spaces and get them move-in ready, be flexible with the lease term, and offer aggressive incentives to land every prospect that is serious about their space.

What adjustments are you (or your industry) making right now?

Ever since the pandemic, the labor market power has been squarely in the hands of employees. Big companies keep hiring and leasing office space like crazy in a land fueled by Covid stimulus checks and low-interest rates. Not enough people to do the work! Stock values were high and business was booming. Big corporate office occupiers were just waiting for the world to go back to normal. After the major Covid scare was over, employees didn’t want to come back, or else they would quit and find another work-from-home job. 

Now, big layoffs at companies like Twitter and Facebook are going to dominate headlines. What this trimming of the fat is going to do is make the remaining work-from-home holdouts rethink their strategy. Do they want to risk being let go? Are they part of the team if they only work remote from home? Will they miss out on promotion opportunities because they are just a remote number? 

Time will tell, but I think the power is slowly shifting back to the employer. Enough fear and doubt about the economy will have employees more interested in keeping a good job and will start showing more face time in the office. I predict a 12-18 month swing of power back to employers which will help office space be more regularly occupied than the ~60% we are seeing in Austin right now. Those companies that chose to keep a physical office presence should see more desks occupied as the recession takes hold. Fear is a great motivator.