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2025 Office Lease Expirations Creating a Dynamic Office Market for Tenants

by King White, on Jun 12, 2024 8:30:00 AM

As 2025 approaches, a significant shift is poised to reshape the U.S. office market. Current projections estimate that approximately 150 million square feet of office space will see lease expirations in that year alone. This substantial figure underscores a broader market transformation driven by evolving work dynamics and changing tenant preferences.

Scope of lease expirations

The volume of office space nearing lease expiration significantly surpasses the segments typically covered under CMBS loans, indicating a widespread impact across the office market landscape. This looming reset of lease agreements offers a unique window of opportunity for tenants and requires landlords to strategize anew in the face of shifting demand.

Current market conditions

Triggered by the widespread adoption of remote and hybrid work, the demand for traditional office space has softened, creating a tenant’s market. With over 1 billion square feet of office space currently available for lease in the U.S., landlords face increased pressure to attract and retain tenants, which enhances negotiating power for businesses relocating or renewing lease agreements.

Opportunities for tenants

With over 150 million square feet of office space set to turn over in 2025, tenants are in a strong position to negotiate favorable terms. They can anticipate:

  • Lower Rental Rates: With an oversupply of available space, tenants may find landlords more amenable to reduced rates or at least lower effective rental rates once you calculate the economic benefits of concessions such as free rent.
  • Enhanced Tenant Improvements: Landlords with solid financing are increasingly willing to invest in tenant improvements to make spaces more appealing as either turnkey build-out or higher tenant improvement allowances for the tenant to customize their space. 
  • Flexible Lease Terms: Options such as shorter leases and break clauses are becoming more commonplace, providing tenants with greater agility.
  • Favorable Business Terms: From expansion rights to caps on operating expense increases, the terms of leases are becoming more tenant-friendly.

Challenges and considerations

Despite these favorable conditions, certain challenges persist, particularly in the high-end market:

  • High Demand for Class A Spaces: Although general market conditions are depressed, Class A office spaces remain in high demand, as companies prioritize quality and location to attract a shrinking pool of office-going employees.
  • Soft Market for Class B and C Buildings: Lower-tier properties may offer economic leases but often fail to meet the requirements of a modern workforce, leading to longer vacancies and difficulty trying to sublease this type of office space.
  • High Construction Costs: Increasing construction costs have made it more difficult for companies to build-outs or remodel their office space and landlord’s tenant improvement allowances are often insufficient. 

Conclusion

The impending wave of lease expirations represents a pivotal moment for the office market. For tenants, this scenario presents a landscape ripe with opportunities to secure advantageous leases, particularly if they are well-informed and strategically prepared. As the market continues to adjust to new working norms, both tenants and landlords must navigate these changes thoughtfully to align their real estate strategies with future demands. Site Selection Group can help advise you on how to take advantage of these market conditions.

Topics:Corporate Real Estate

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