- Facebook secured a 9% discount on its blockbuster office lease at the Farley Building on Manhattan’s West Side, according to several sources who had viewed the terms of the deal.
- The discount could be emblematic of the kinds of sweeter economics that landlords will have to offer tenants to convince them to take space now.
- Another office tenant, Raymond James, secured a clause in a recent lease it signed to revisit the economics of the deal in two years, allowing it to capture discounts if the market drops.
- Cushman & Wakefield predicts the office market nationally is in for a severe decline, with 145 million square feet of space set to be added to the country’s pool of vacant space by the end of next 2021.
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Office landlords are lowering rents and sweetening leasing deals to convince tenants to take space amid the twin challenges of a pandemic and a recession touched off by the virus crisis, according to market experts and data reviewed by Business Insider.
The concessions, which also include longer periods of free rent and more generous contributions to the costs of building out an office space to ready it for a tenant’s occupancy, show the financial lengths landlords are having to resort to in order to convince office occupiers to commit to deals.
Prominent among the recent examples is Facebook’s blockbuster lease at the Farley Building on Manhattan’s West Side, where the social media giant was able to secure a 9% discount on the deal, which began negotiations last year, before the Covid-19 epidemic and was completed last month.
Read More: Amazon just leased a new space in Brooklyn to house recording studios for its music-streaming service, as Big Tech keeps gobbling up space while the office market flounders.
Facebook agreed to pay $109 per square foot in rent for the space, a rate that escalates by $10 per square foot every five years in the 15-year transaction, according to four sources with knowledge of the terms.
In addition, the company received 18 months of free rent for 80% of the space and 23 months of free rent for the remaining 20%, according to three of the sources. Vornado Realty Trust, the large New York City landlord that is redeveloping the former Post Office property, will also pay Facebook $146 million towards the cost of building its office installation in the space.
A spokeswoman for Facebook and a spokesman for Vornado declined to comment for this story.
Facebook and other tech giants have been a rare bright spot for the office market
Before the onset of the pandemic, Facebook had been closing in on a more expensive deal for the Farley Building, with rents that began at $113 per square foot, according to three brokerage sources, a shorter 15 month period of free rent, and a slimmer build-out contribution of roughly $110 million.
In total Facebook is agreeing to spend a little over $1 billion over the life of the office lease it signed at the Farley Building, about 9% less – or a roughly $103 million discount – to the roughly $1.13 billion deal it had previously been arranging.
Another knowledgeable source suggested that the deal Facebook agreed to offered a far slimmer discount of about 3% versus the original terms of the transaction pre-Covid.
Either way, the Facebook lease represents an extraordinary commitment by a tenant at a moment when uncertainties linger over the future of the office workplace. Facebook and several other tenants, particularly in the booming technology sector, have continued to commit to office space, even though many companies now expect they won’t return back to the workplace until summer 2021, or have embraced remote work permanently.
Read More: A senior Facebook executive reveals why the company is still betting on NYC real estate with its recent blockbuster office deal.
The overall leasing market both in the city and nationally, however, is moribund, forcing landlords to sweeten the economics of transactions to convince the few tenants that are active today to commit to space.
“Landlords are generally having to discount rent, give more tenant incentives, and throw in other goodies, such as future expansion rights,” said David Falk, the New York area president of the real estate services firm and brokerage Newmark Knight Frank. “Otherwise, they could be sitting with a vacant space for years.”
Falk said Newmark had estimated there has generally been an over 10% drop in the economics of leasing transactions since the pandemic began. That number could grow.
“We anticipate we could see as much as a 27% decline in rents,” said David Goldstein, a vice chairman at the tenant-focused brokerage and real-estate services firm Savills, who noted that decrease would be on average across the market in Manhattan, with newer, better buildings seeing less of a drop.
Office leasing activity has plunged in the first half of 2020
About 10.3 million square feet of office space has been leased through the first eight months of 2020, nearly half the level of activity during the same period last year, according to the real-estate services firm CBRE.
One reason behind the lack of leasing deals is uncertainty among tenants around what impact remote work could have on their footprints. There’s also a general reluctance to commit to leasing transactions at a moment when the market is falling and most experts expect better economics in the coming months.
To protect itself in a recent 144,000-square-foot deal it signed at 320 Park Avenue during the pandemic, the financial-services firm Raymond James secured a “rent review” in two years, allowing it to receive a discount on its space if office rents drop, according to terms of the deal that were shown to Business Insider by a source.
Such clauses may become more commonplace, experts said.
“We are similarly analyzing and utilizing those strategies to underwrite certain types of opportunities to transact and give tenants and landlords the ability to revisit economics during a more stabilized time in the market,” Goldstein said. “Going forward, tenants will require more flexibility and landlords and their lenders will become more accustomed to granting it.”
A spokesman for Raymond James did not immediately respond to a request for comment on the deal.
Nationally, the office market could be poised for a major drop that is more severe than the great financial crisis a decade ago and the dot-com bust in the early 2000s.
The real-estate services firm Cushman & Wakefield released a report this month predicting that about 145 million square feet of office space will be added to the country’s pool of vacancies by the end of next year, an addition that would represent about 2.7 of the nation’s total inventory of office space.
The dot-com recession and great financial crisis saw slimmer upticks in empty space totaling 2.4% and 2.2% of inventory respectively, according to Cushman.
Cushman also predicted that vacancy will grow from a current national average of 13% to 17.6% by the middle of 2022. The report projected that asking rents could fall by 9.3% during that uptick in vacancy. That would be more than the financial crisis a decade ago, which saw an 8.6% decline in asking rents, but less than the 17.8% drop in the dot-com downturn.
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