One Office Market Seeing Uptick? Satellites

Wakefield Research survey: Mid-size businesses are setting up satellite offices rather than ordering employees back, “bringing the company to them.”

NEW YORK – A study released this week by lease accounting software company Visual Lease found that 70% of the senior real estate executives polled say their clients are looking for more office space as a part of their real estate strategy for 2023. Whether the study represents wishful thinking or a finger on the pulse of something few can touch right now, that optimism flies in the face of the conventional fear that empty commercial office spaces haven’t come close to seeing the bottom yet.

According to new data from real estate giant Cushman & Wakefield plc, which has 400 offices in 60 countries, vacant office space throughout the U.S. is projected to grow to 1.1 billion square feet by the end of this decade. Those numbers were up 688 million square feet from pre-pandemic numbers when remote work became the norm.

The Visual Lease survey, conducted by Wakefield Research, sees things differently. Visual Lease CEO Robert Michlewicz attributes that to mid-sized businesses that instead of ordering remote employees to come back to the office are opening new extended offices to “bring the company to them.”

“As an example, financial services companies are a fast-growing sector in lease portfolios, and they’re looking for more opportunities to lease satellite locations to maintain business continuity,” he said. “Many companies have moved to a hybrid or remote-first plan that requires fewer people coming to their hubs and less of a need for square footage at prime locations.

Meanwhile, according to The Wall Street Journal and data from Trepp, companies are not only trying to figure out what to do with empty office space but also struggling to pay for it. The data shows the delinquency rate on office loans increased by a quarter percentage point to 1.83% last month. It’s the largest increase since December 2021. One of the issues may be that companies behind on their office loans are reeling from the fact that they don’t even know what they’re paying for.

The most jarring number from the Visual Lease survey was that 71% of private companies don’t know how much their office leases cost their businesses. Michlewicz believes that recent accounting mandates and the ability to hire companies like his to manage property leases will positively change that statistic. He says the issuance of global lease accounting standards, IAS 16 and ASU 842, which took effect in 2019, “brought lease portfolios to the balance sheet.”

Lease awareness and remote office space or not, many larger companies have given up on bringing their employees back to the home office. For example, Papa John’s International Inc. announced this month that it would be dumping its 140,000-square-foot Louisville, Kentucky, corporate headquarters. The company told employees they will still continue to work in the city, just not at that office.

Papa John’s spokesperson Harrison Sheffield told the Courier-Journal, “Since returning to the office, we have, like other companies, been engaging with team members to figure out what is this new normal that some of us are still building and what works best for team members to support their particular functions. … And a physical location has a role to play.”

Visual Lease’s Michlewicz says these types of office space changes have been coming for a while.

“The ground has been shifting under their feet for a few years” as companies try and get a sense of what their office space needs will be. “They’re looking for more flexibility than they’ve had before, including demanding shorter-term leases.”

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