By David M. Zimmel, Zimmel Associates
As we navigate a post-pandemic world, the office and industrial real estate markets are facing significant changes. The office market is gradually adjusting, influenced by hybrid work models, while the industrial sector is seeing a surge in available space, pushing rents down. In this shifting environment, landlords and tenants must adopt strategic approaches to remain competitive and thrive.
Office Market Overview: A Gradual Transition
The office market is evolving slowly, with no major changes expected in the near future. Many companies are still adapting to post-COVID work models, with employees working in the office only two to three days a week and the rest remotely. As leases expire, companies are reassessing their space needs, often choosing smaller spaces or redesigning their current offices to reflect the decreased demand for in-person attendance.
While the office market is unlikely to experience dramatic changes over the next year, prime-location A-grade buildings, such as those in Metro Park and Jersey City, are expected to outperform B-grade properties and less desirable locations. Larger companies that still need office space are increasingly drawn to buildings with superior amenities and are willing to pay a premium for these features. These companies can often afford higher rents per square foot because they are leasing smaller overall spaces.
Industrial Market Developments: Surging Supply and Declining Rents
The industrial market is witnessing a substantial increase in available space. A year ago, options for spaces ranging from 15,000 to 30,000 s/f were scarce. Today, searches may reveal 8 to 15 potential vacancies, indicating a significant rise in supply. This increase has led to a reduction in rental rates, with rents falling by approximately 10% to 20% in some areas due to the supply-demand imbalance. Previously, landlords pushed rents aggressively when space was limited. However, with the current abundance of available space, landlords who are not heavily leveraged are more willing to negotiate lower rents to fill their buildings rather than leave them vacant.
In the big-box sector, the rise in available space has corresponded with a decline in rents. Demand is unlikely to match supply within the next year due to excessive overbuilding, making it probable that leasing up the vacant space will take more than a year. Although the industrial market is not as challenging as it once was, rents are expected to remain down by 10% to 20%, with ample supply for tenants to choose from. This increased availability will likely lead existing tenants to negotiate more aggressively when their leases are up, aiming to stay in their current buildings rather than relocating. With numerous vacancies, landlords will likely be more inclined to negotiate to retain tenants rather than risk prolonged vacancies.
Recommendations for Landlords: Prioritize Presentation and Pricing
Given these market conditions, landlords should focus on the presentation and pricing of their properties. Ensure that vacant spaces are well-maintained with updates such as LED lighting and clean floors and walls to enhance their appeal. It is crucial to keep rental rates competitive, especially if the property is not in a prime location. Being the most expensive building on the market may not be a viable strategy in the current climate. Instead, attract tenants quickly by offering a well-maintained space at a fair price.
The current market is affected by overbuilding driven by the post-pandemic rush to meet anticipated demand, which has not materialized as expected, leaving developers with excess inventory. Landlords with existing properties and fewer financial obligations have the flexibility to offer more competitive rents, potentially leasing their spaces more quickly compared to those burdened by large mortgages.
Industry Demand: Steady with Some Growth
Regarding industry demand within the industrial sector, there has not been a significant surge in interest from new sectors. The need for space in the third-party logistics (3PL) sector remains, but it is not as intense as it was two years ago. There has been a slight increase in interest from manufacturing and assembly operations. Additionally, the healthcare and pharmaceutical sectors remain strong in New Jersey, with some projects specifically catering to pharmaceutical use expected to perform well.
In Summary:
In a rapidly changing real estate environment, adaptability is essential. The office and industrial sectors each face unique challenges, from hybrid work affecting office demand to oversupply lowering industrial rents. However, with the right strategies and a proactive approach, landlords and tenants can successfully navigate these shifts and even find new opportunities for growth in an evolving market.
David M. Zimmel is president of Zimmel Associates.
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