By Kate Snyder
As the first quarter of 2023 comes to a close, the trends that will define the Bay Area’s leasing market for the year may be starting to emerge. To offer his own speculation on the market’s outlook, Nick Slonek, principal and regional managing director for Avison Young, answered some questions from The Registry.
Slonek opened Avison Young’s first San Francisco office in the city’s financial district in April 2012, according to the firm’s website. Since then, he has opened offices in Silicon Valley/San Jose, Oakland, San Mateo, Sacramento and Denver. He manages the San Francisco office day-to-day and oversees the Northern California region. With more than 30 years of experience in the downtown San Francisco commercial real estate industry, Slonek has represented more than 20 million square feet of local, national and international office tenants and landlords.
Leasing has been difficult in 2022, but what trends can you say have emerged that are of note?
Yes, difficult. Professional services are in full flight to quality/experience mode. Relocating or renewing for less gives them an opportunity to ‘upgrade’ their space for the same or less cost. Tech is pretty much on the short term ‘stay in place’ program. Subleases are hitting new lows and landlords are goosing up concessions (free rent and tenant improvements) to record highs….all to attract the brave, motivated tenants in the market.
What do you think will happen in 2023 in terms of leasing rates?
In some cases, that of view/trophy space, rates will increase but on a whole Class A commodity rental rates will drop modestly but concessions will increase per above.
Will landlords succumb to growing vacancies and cut more deals than they did in 2022?
For the right tenant (credit, ‘name brand’), yes.
What characterizes a successful leasing deal these days, and will that evolve in 2023?
Just getting a transaction completed. There are so many start/stops it is hard to get deals consummated.
What are you seeing with renewals? Are companies still shrinking their footprints, and what is affecting their decisions?
Renewals are rampant. Short term, low capex exposure to the landlords…band-aid approach. Most landlords are willing to do short term renewals because they are playing the long game. The current market conditions will not be forever. Tenants and landlords are currently of the same mindset, ‘let’s wait and see’…two to five year direct renewals compete with low cost, P&P subleases. Upfront capex is still a tenant’s worst enemy.
What surprised you the most over the last 12 to 18 months? Do you think that trend will continue into 2023 and beyond?
Landlords concessions have to be at the forefront of everyone’s mind. Over $200 per rentable square foot for a tenant improvement package for a 10 year term is surprising. 12 months of free rent is fairly common for an 11 year deal. Another interesting trend that will definitely continue in 2023 is the capital that landlords are putting into their buildings. Uber-amenitizing of assets has become the norm for most Class A owners. Decks, golf simulators, state-of-the-art gyms, etc. are all pretty much commonplace. Larger spec suites of over 15,000 rentable square feet are common now, too, sometimes with over $150 per rentable square foot price tags.
How did 2022 end for you and your firm? Was it as expected or were there some surprises along the way, too?
Our U.S. business had record revenues. Our capital markets suffered a bit due to the current interest rate environment but our leasing service line was excellent. Cost control was also a big part of our profitability. Our success was expected due to our loyal clientele, leading edge data analytics, consultative approach and our client centric focus.
As you look at the market dynamics in 2023, what do you think will be the most significant things that will define the industry in the coming year?
Patience. We are advising our clients, both landlords and tenants, not to rush into anything. Strike when the opportunity most suits your business model and strategy.
Is that worrisome? Why or why not?
Not at all because we, collectively (landlords, tenants and brokers) are in for the long hall. If you are patient and implement when the time is right, good things will happen.
What opportunities do you see in the coming year, and how are you and your firm preparing for the year ahead?
A lot of consulting and right sizing of portfolios. Consolidation, expansion in key markets and working with special servicers are all key opportunities. We are well positioned to use all of our internal strategic partners to make this happen.
A year from now, what do you think we’ll be talking about?
How the market overperformed expectations. That 2024 will be even better and more fun!