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Where Office Workers Go, Retailers Will Follow

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Pinterest is paying $90 million to get out of a San Francisco office lease; its workers instead will stay home. In New York City, Facebook is opening a huge workspace in Hudson Yards. Both stories have made headlines in recent months, largely because major office property deals have become rare, according to JLL vice president of research Walter Bialas.

The once-booming office sector is moribund thanks to uncertainty. “Lease terms have become extraordinarily short,” Bialis said on the ICSC Connect Virtual Series episode The Impact of COVID-19 on the Office Sector. When it’s time to renew, companies are signing extensions of only three, six or nine months, he said. “Very few companies are making big decisions. Everybody else is sitting pat.” Leasing activity in the office sector is down by 70 percent, he added.

Yet landlords are hesitating to lower rents, too, which hinders dealmaking, Bialis added. “My clients are looking out there and saying, ‘Where are the deals?’ Owners are not bringing rents down.” A bit of free rent and the odd additional tenant allowance are the most landlords will give up, he said. “Owners are hoping we’ll recover quickly. Everybody’s waiting to see who blinks first.”

“Office is having a retail moment. It wasn’t too long ago that everyone was predicting the death of brick-and-mortar,” said Joe Brady, Americas CEO for Instant, a workplace innovation company focused on corporate real estate. Brady formerly served as head of real estate for Walgreens. To stay alive alongside e-commerce, many retail properties have incorporated experiences and technology. Office properties, too, will adjust to the post-pandemic market, he said.

What it Means for Retail Real Estate

Retailers will have to become more flexible in their locations and study daytime traffic data as it changes. “There will be some autonomy to do work where we want to do it,” Brady said. “There will be three places where people will work: at a hub, at home and at a hybrid somewhere in between, maybe near a client or customer.” Coworking operator Convene has taken space with Brookfield Property Management and its peer Industrious has taken space with Seritage Growth Properties, Brady said. Expect to see more tie-ups between office and retail as developers and retailers meet consumers where they are.

Source: 2020 ICSC.

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