“In 2019, pre-pandemic, we really had a record year in the office sector. We leased just over six million SF, which is the highest for Kansas City. But then in 2020, leasing demand fell by half and it continued to slow into 2021 to just over three million SF leased, which is the worst in leasing activity since 2007,” said Kelli Griffith, sales associate, CoStar Group.
Griffith, together with panelists Marty Gilchrist, senior associate, Cushman & Wakefield; Anné Erickson, vice president, JLL; and Janelle Matlosz, partner, Perspective Architecture + Design, discussed the post-pandemic state of the office market at a luncheon hosted by CREW KC. Stacie Prosser, market president and publisher, Kansas City Business Journal, moderated.
The office market still struggles to recover. A total of 3.2 million SF of direct office space was leased in the Kansas City metropolitan area last year.
“And just looking backwards, this was the lowest year on record since 2007, which that year about 2.9 million SF of office space was leased,” Griffith said.
Both nationally and locally, the glut of office space on the market, including record levels of available sublease space, is hindering recovery, said Griffith.
“So before we can consider the office market to be really healthy, the sublet availability needs to stop climbing and start coming back down,” she said.
Griffith said Kansas City falls within the top eight markets with the highest vacancies across the United States. In addition, Kansas City ranks as the third slowest market nationally based on absorption. More space was vacated than was leased in the past two years.
Companies that located their back offices and call centers in large leased spaces in Kansas City shed space when their employees could work virtually. Erickson said this is one reason Kansas City has seen such a high level of negative absorption.
Gilchrist said in the past year, almost 80 percent of her firm’s clients are doing more with less space.
“A lot of our tenants who are deciding to stay are downsizing,” she said.
Matlosz said one of the biggest trends in the office market she is seeing currently is de-densification. Gone are the pre-pandemic days when a company tried to fit as many people per square foot as possible.
“When the pandemic hit, that totally flipped, and we still are seeing more privatized spaces over collaboration spaces. Collaboration spaces are totally going away for the most part,” said Matlosz.
She said in order for employers to retain and recruit new talent, they must redesign or refreshen their space. Employees no longer have interest in such amenities as fancy game rooms which were popular pre-pandemic. They no longer want amenities that keep them at the office for extended hours.
“More of the spaces are used for privatized rooms where people can come in for a touchdown meeting in the office environment. It’s more about coming together to collaborate and seeing everyone,” Matlosz said.
Erickson said that working virtually 100 percent of the time no longer is that common. Working with a hybrid schedule — in the office some days and working from home other days — is the new normal.
She said according to a national study, when people are out of the office more than three days a week, they begin to have negative feelings about their job.
“What we’re seeing is a spectrum — 2 to 3 days in; 2 to 3 days out —some variation of that is easily the most common of what we’re seeing,” said Erickson.
Matlosz said another trend in the office market is the flight to quality. Companies are seeking enhanced spaces with less square footage.
“Absolute Class-A plus, trophy new construction buildings are doing quite well from a leasing standpoint and you can expect them to continue to. They’re taking that dollar saved from reducing the square footage and pumping it back into a higher quality building,” Matlosz said.
Erickson said landlords are offering “blend and extend” to existing tenants to entice them to stay in their space. For example, if a tenant has three years remaining on its lease term, is confident in future space needs and wants to capitalize on that certainty, the landlord might extend the lease another three to five years and offer the tenant some free rent and tenant improvement dollars.
She said she also is starting to see landlords recruit tenants to move to their building by offering to buy out the tenant’s current lease obligations.
Gilchrist said landlords leasing spaces of less than 1,000 SF are offering more generous tenant improvement allowances.
Those tenants shedding space with terms left on their leases are flooding the market with space to sublet. But, subleasing space is challenging.
“So the challenge for subleasing is that the [sub]tenant needs to like the space the way it is because there aren’t tenant improvement dollars out there from the sublandlord. They are already at a loss for this lease obligation and they do not want to spend money rebuilding for you also. Go to the landlord if you need tenant improvement dollars and extend the lease past your current obligation,” said Erickson.
Though it will look different post-pandemic and be slow to recover, the office market is not doomed.
“The existence of the office as a physical collaboration, innovation and culture coming together as a team is going to continue,” Erickson said.
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Feature photo of the panel from left: Stacie Prosser, Kelli Griffith, Anne’ Erickson, Marty Gilchrist and Janelle Matlosz. Photo credit: Layne Haley Photography