A burst of office leasing that included larger average deal sizes, propelled in part by more employers requiring workers to return to the office, helped drive strong revenue and profits for the largest commercial property brokerages.
JLL, the world's second-largest brokerage, said its 34% increase in office leasing revenue was powered by a 45% increase in the number of leases spanning 100,000 square feet or more, Karen Brennan, the company's chief financial officer, told investors during its recent earnings call.
JLL joined CBRE, Cushman & Wakefield, Colliers International and Newmark in reporting increases in leasing, activity that added to promising signs of recovery for a commercial real estate industry that has suffered from COVID-19 pandemic-induced challenges and other economic headwinds.
"Tenants are pushing to make decisions now,” Brennan said, noting that the average return-to-office requirements have increased to 3.3 days per week from 2.2 days per week a year ago. "We expect to see continued [return-to-office] impacts for the Fortune 100 companies."
CBRE’s global office leasing rose 26% — the brokerage’s biggest jump on record for a third quarter — as businesses signed deals for newer digs to bring workers back to the office. Greater certainty about the economic outlook is supporting such decisions across the nation's biggest cities, CEO Bob Sulentic said during its conference call.
While the number of larger office leases has started to tick up, Brennan acknowledged that the average deal size remains 50% below pre-pandemic levels.
Growing confidence
A recovery over the past year in office leasing is starting to broaden as more companies make decisions, Jacob Rowden, senior manager for U.S. office research at JLL, said in a recent podcast.
“Among these leases being signed, there’s a lot less downsizing activity,” Rowden said. “Earlier in the pandemic, tenants were cutting their footprints pretty substantially in some cases. That’s now starting to normalize as more folks are in the office, and [tenants are] starting to realize they need to hold [on to] more of that space.”
Several large deals drove a 22% jump in office leasing revenue for Toronto-based Colliers International, according to Chris McLernon, the firm's chief executive officer for real estate services.
"There's been some hesitation over the last few years, but now there's some confidence in the economy, and companies are making some of these bigger decisions," McLernon said during an earnings call.
In a sign of the recovery in leasing activity in midtown Manhattan and other big office districts across the country, private equity giant Blackstone signed a deal in July to grow its footprint at 345 Park Ave. in New York City to over 1 million square feet, and extend its lease at the Rudin Management-owned property through December 2034.
Douglas Emmett and BXP, based in Boston, are among large office landlords enjoying renewed leasing activity.
Douglas Emmett, based in Santa Monica, reported one of its best quarters for new leasing activity since the pandemic's onset, as tenants signed on for more space than they gave up across the company's West Coast office portfolio, CoStar News reported. The firm inked more than 1 million square feet of leases in the third quarter, about 353,000 square feet of which was generated by new deals — the most new deals the firm has signed in a single quarter since 2022.
The bulk of transaction activity in BXP's downtown San Francisco properties included a flurry of deals by financial firms, including asset managers, private equity, venture capital and hedge funds and their financial and legal advisers, President Douglas Linde said during a recent conference call.
“There continues to be lots of small clients actively looking for space,” Linde said.
Upgrades, conversions
The most recent leasing activity shows that demand is starting to spread from the highest-quality offices to older buildings.
“There's a lot of news around prime space being leased up in a number of markets at the highest rates ever,” Sulentic said. “However, we don't believe that this leasing success we've seen recently is driven by prime space. We believe it's being driven by occupiers who want space and are targeting prime space first, and when that prime space is leased up, they will move on to the next best thing.”
Some owners of those older buildings are upgrading them in order to lure new tenants.
"Everybody is talking about office space as being important to their future, so we expect there to be a sustainable move toward office space that is creating good experiences to get people back in the office," Sulentic said. "And we think the leasing success we've seen is going to continue into next year and beyond.”
Sharp declines in new construction, and the removal of some older office buildings for conversions to other property types, are also helping reduce the office space overhang, JLL's Rowden said.
"That’s started to push us into a position where overall office inventory is starting to decline, which is helping us reach this important inflection point overall where availability rates are starting to decline," Rowden added.