A year defined by working from home has turned commercial brokerage into quicksand. Deal volume is abysmal, requirements are shifting, lease length is shortening and the few deals getting done are taking longer than ever before. For commercial real estate brokers, 2020 is a year they’ll want to soon forget. A year filled with so much uncertainty certainly has been a headache.
It will take time to understand just how difficult the year has been for commercial real estate brokers. Initial anecdotal evidence isn’t good. Nationally, investment sales plunged, dropping nearly 70 percent according to CoStar data. Office absorption in the third quarter totaled negative 36.1 million square feet nationwide, the lowest total in almost 20 years, according to Colliers research. Negative absorption over the past six months stands at a cumulative 49.7 million square feet. Negative absorption is a sure sign that deals aren’t getting done and commissions aren’t being earned. Major publicly traded commercial brokerages are feeling it already. JLL Research reported that activity in the third quarter was down 46 percent from a year earlier, an improvement over Q2, but still far too low. CBRE’s third quarter leasing revenue was down 36 percent, according to the firm’s recent earnings call.
“I had a large national client in space plans from August until December as they worked with their programmer to plan the new layout post COVID,” Logic Commercial Real Estate Vice President Natalie Wainwright posted on Twitter. Her experience is similar to many others.
Social media is full of stories from broker’s dealing with their latest client requirements. It’s not surprising that in a time of so much uncertainty, clients are uncertain about their real estate needs. Now is the time to score a great deal, but what that deal needs to look like isn’t clear. Brokers are scouring markets, most virtually, for ever changing needs that the occupants themselves don’t fully understand. Understanding these needs is what brokers do best, but first the client must have an idea of what they want.
All that indecision is slowing down the entire process. In 2020, the median number of days between lease execution and commencement dates for office space increased by a full month, to 126 days nationwide. This is more than one month longer than the average over the past 5 years, according to new Compstak data. Delayed commencement does not decrease net effective rent, benefitting landlords. In exchange, landlords are offering more flexibility beyond traditional concessions.
“There’s so many people involved in a deal, so many emails and calls flying around, it takes more time now with everyone working from home,” Colliers Senior Vice President Coy Davidson said. “Maybe the lawyers are super busy, but why is it taking two months to get through a lease agreement? Stakeholders are asking when are leases going to get done? Everything is taking longer than normal.”
Davidson thinks it has a lot to do with working from home, where people just aren’t as productive. At home, whether it’s the kids, the spouse, the pets or the news, it seems like a distraction is around every corner. Those distractions add up over time, a delayed email response here, an unreturned phone call there. Then there’s Zoom, a form of distraction in its own right. Just like real meetings, it’s possible for a Zoom meeting that could’ve been an email to eat into productivity. Working from home has turned more simple calls or emails into full-on scheduled events as a way to ‘stay connected.’
Just finding a time to look at a potential property is taking longer. Virtual touring is the first step, which is time consuming for brokers in its own right. Getting a sense of a space through a screen takes much longer than being physically present. But even when it’s time to tour the space they found online, travel restrictions and social distancing make scheduling a time for an in-person tour a difficult back and forth taking even more time. Then there’s the due diligence for the potential space. Getting service contractors out for inspections is cumbersome during a pandemic. A 30 day process ends up taking 60 days, which in the tumultuous market of 2020, can make or break a deal.
Commercial lease terms are also getting shorter. Within the first five months of 2020, the average office lease term decreased 15 percent and will likely continue to decrease in duration until a vaccine is widely available to the public. Shorter leases hurt broker fees even further. Making matters worse, rents are falling too. Shorter leases and lower rents are directly impacting broker fees that rely on commission.
Another issue is that lease agreements are getting more complicated. Tenants are demanding more flexibility in the form of space modifications and increased build-out costs. Pandemic protocols are being written into contracts, specifying cleaning regimens. The force majeure clause is being revisited to include pandemic language. The reality is that most lease agreements are favorable to the landlord and many tenants are using their current leverage to change what they can. The back and forth between stakeholders and their lawyers is filling time and inboxes.
A year full of headaches and declining fees has put commercial brokers in a pinch. Hope is on the horizon in the form of a vaccine. While surviving the pandemic has been tough, for many, it’s solidified the importance of the office. Workers will come back to the office, how many and how soon is the question. This holiday season, brokers are counting their blessings as deal volume begins to return to normal and clients solidify plans for a post-pandemic workplace. A hard year has taught hard lessons.