Adam Wray isn’t keen on paying for office space that he no longer needs.
Although workers at Wray’s company, AstrumU, an artificial intelligence firm in Kirkland, are back in the office at least three days a week, CEO Wray doesn’t know yet whether they’ll actually need all of the 7,200 square feet AstrumU now leases.
Given that uncertainty — and the costs if Wray guesses wrong — he’s looking to extend his lease a year instead of the usual three. That would’ve been unheard of for a growing tech firm before COVID-19. But these days, Wray says he’s “concerned about committing to more than a year.”
Wray is among a rising number of Seattle-area employers rethinking how much office space they’ll need amid continuing unpredictability of COVID and the hazy status of the traditional office.
And that uncertainty is showing up in what might be called the incredible shrinking office lease.
During the last three months of 2021, commercial office leases for Seattle-area buildings averaged 71 months in length, according to CompStak, a commercial real estate data company that tracks individual leases.
But by the first quarter of 2022, average lease length was down to 58 months, which is seven months less than in the first quarter of 2020, right before the pandemic, according to the CompStak data.
Alie Baumann, CompStak’s director of real estate intelligence, says the recent drop in lease length likely mirrors shifts in corporate sentiment over the last six months.
In late 2021, many companies were announcing return-to-work plans “and were feeling comfortable coming back,” Baumann says. “And then omicron put a delay on decision-making and further solidified hybrid [and] remote work which seems to be the dominant trend.“
Starting rents also fell: from an average of $57.74 per square foot in the last quarter of 2021 to $54.48 last quarter, CompStak data shows. They were $51.93 in the first quarter of 2020.
CompStak’s lease data mirrors anecdotal accounts by Seattle-area employers and by commercial real estate brokers, who say clients are opting increasingly for shorter leases.
Before the pandemic, most of the office deals signed by big employers “were 10-year leases,” says Brian Hatcher, president and chief operating officer at Kidder Mathews, a West Coast commercial real estate firm. These days, he says, it’s “three to five.” And some tenants that have opted for 10-year renewals have reduced the square footage they’re taking, Hatcher says.
For that matter, Kidder Mathews renewed some of its office leases for five years, “but we’re not comfortable right now going longer than that,” says Hatcher. “And we’re in the business.”
The CompStak data tracks with other local data points.
Commercial office-vacancy rates remain painfully high, especially in downtown Seattle, where it was nearly 20% at the end of the first quarter in 2022, compared to 11.4% in early 2020, according to Colliers, a commercial real estate agency.
Vacancy is particularly high in so-called B and C class office space, which tends to be older and less expensive than Class A space.
In downtown Seattle, 26% of the B and C office space is vacant, according to Colliers.
That’s partly due to the fact that larger firms favor Class A properties and have the resources to gamble on longer leases, says David Gurry, a senior vice president at Colliers.
In the B and C sectors, by contrast, “you often have buildings full of smaller tenants,” Gurry says. Many are renewing for just a year or two as a way “to kick the can down the road” until the back-to-work trend stabilizes.
As important, the CompStak data tracks with trends in the Seattle area labor market, which suggests shorter leases could be around for a while.
In the Seattle area, openings for computer- and math-related jobs and for business- and finance-related jobs, many of which can be done remotely, jumped 47% from January to April, according to the state Employment Security Department demand report.
And thanks to the tight labor market, many employers are still allowing many of those positions to be remote or hybrid to help attract new workers and avoid losing existing ones, recruiters say.
Remote work “is still a leading preference and a leading search criteria employees are using when searching for opportunities,” says Megan Slabinski, district president for recruiting firm Robert Half, who oversees recruiting for tech, marketing and other sectors in Washington, Oregon, Northern California, Utah and New Mexico. Her firm’s latest survey found that “50% of workers say they would quit if they were required to return to the office full time.”
Those workers’ preferences, it turns out, have a direct impact on leasing.
A study published last week in the social science journal SSRN by researchers at New York and Columbia universities found that firms with more remote job listings were significantly less likely to demand office space, according to one of the authors.
The study didn’t break out data for the Seattle area. But in an email, author Arpit Gupta, assistant professor of finance at the NYU Stern School of Business, noted that markets, such as the Seattle area, “that feature a lot of interest in remote positions by local employers are going to see additional stress on local office markets.”
That stress is coming from employers such as FlowPlay, a gaming company with headquarters in downtown Seattle. Staff come into the office just two days a week now and the firm is looking hard at a managers-only office model, says CEO Derrick Morton.
As much as he values the office for maintaining company culture, Morton says, FlowPlay’s future office needs were so uncertain that he’d decided to extend his lease just a year — and opted for three years largely because the landlord offered a “significant discount,” he says. “We are paying less than we ever have.”
Lease price pressure isn’t being felt equally.
In Seattle-only offices, average lease length in the first quarter of 2022 was 54 months, vs. 67 in the fourth quarter of 2021 and 68 in the last quarter of 2019, according to CompStak data.
By contrast, in the combined Bellevue-Kirkland-Redmond markets, the average office lease length was 69 months, compared to 70 months in the prior quarter and 58 months in late 2019.
That regional unevenness partly reflects the larger role that Big Tech firms are playing in the Eastside market, says Colliers’ Gurry.
But another key driver is the relative tightness of the Eastside office market, which has about half the vacancy of Seattle, according to Colliers data. Employers wanting to be on the Eastside know if “you don’t take space now, there may not be space for you a month from now,” Gurry says.
Whether shorter leases are a temporary response to WFH uncertainty or something longer-term is a subject of intense local debate.
Real estate industry officials in the Seattle area are taking the long, but optimistic view.
Though office landlords no longer expect a quick recovery, they do see leases normalizing eventually as employers find new ways to lure back workers and as the hot job market absorbs vacancies, says Rod Kauffman, president of Building Owners and Managers Association of Seattle-King County.
Others aren’t holding their breath, given the continued demand for jobs that can be done remotely or hybrid.
Many Seattle-area employers have largely already made their office-related adjustments, says Josh Wong, a director at the Seattle office of CVPartners, a placement firm specializing in finance, accounting, audit and tax jobs. Until there’s some major shift in the job market, he says, the way “they’re situated now is going to be how they’re going to be moving forward.”
That seems to be reflected to some degree in data on office occupancy. The number of workers in downtown Seattle offices has hovered at around 33% since late February, according to cellphone location data from Placer.ai and posted by the Downtown Seattle Association.
Nationally, office occupancy rates also seem to have stalled at around 43% since March, according to Kastle Systems, a security firm that measures office occupancy by employees’ key card usage.
At AstrumU, Wray is confident the market will eventually figure out office configurations that fit different firms’ post-pandemic work realities.
The problem, he says, is “I don’t think we quite know how long it’s going to take to figure it out.”
Trying to hedge that uncertainty with a shorter lease carries its own risks. If Wray’s landlord opts for a longer-term tenant, “we could literally be caught without a location,” he says.
But against the risk of a long, expensive lease, “I would just rather open it back up and roll the dice,” Wray says. “There’s just too many unknowns.”