Markets with longer lease terms, on average, also have a lower probability of occupant renewal once those leases are up. There’s a clear relationship between average lease term length and the probability of lease renewal. While the national renewal average is 64%, primary markets with typically longer lease terms – including New York and Washington, DC – reflected renewals hovering in the mid-40% range.
As commercial real estate markets continue to expand, the consensus is that a peak is approaching.
The office market is no exception. As a result, forward-thinking office investors are beginning to take a defensive stance with their portfolios in anticipation of the next market downturn.
CoStar analysts recently assessed office leasing trends – particularly the relationship between average lease terms versus average renewal rates. Here’s what they found.
Markets with longer average lease terms also tend to have larger-than-average tenant spaces – and again, take longer to lease back up. Not only are tenants of larger spaces less likely to renew; once vacated, these larger spaces take significantly longer to lease back up than their smaller counterparts. Nationally, vacancies larger than 100,000 square feet take about 19 months to lease-up, versus 14 months for spaces between 10,000 and 20,000 square feet. Across all markets, the trend is standard: the smaller the vacancy space, the shorter the lease-up time.
Lessees in fast-growing industries including technology and energy tend to be less likely to renew their leases. This makes sense in startup-heavy markets like San Francisco. Rapid company growth, increasing headcount, new offices and other disruptive factors require fast decisions and flexibility; the option to lock into long-term leases is not an attractive or practical choice for such businesses.
One way investors are preparing to reinforce their bottom lines in the days ahead is by focusing on securing their existing tenants at the relatively high rates being paid today. In markets that have seen substantial rent growth, owners and asset managers should consider locking in tenant rates when they can.