These Growth Markets Logged the Most Lease Renewals Over the Last Six Months

Article originally posted on Globe St. on April 11, 2021

Phoenix, Norfolk, and Atlanta led office lease renewals in a recent analysis by Moody’s Analytics REIS, while New York City and Chicago lagged at the bottom of the heap.

Moody’s analysts determined this when they examined recently expired leases relating to office properties collateralizing CMBS loans where at least one top five tenant had a lease that expired within the last six months in 10 cities. Analysts then aggregated data to the metro level with sample sizes of 10 to 50 office properties per metro area.

Phoenix reported lease renewal rate of 79%, with Norfolk and Atlanta following behind at 75% and 74%, respectively. Meanwhile, NYC showed a 40% renewal rate and Chicago clocked in at 50%. But while 60% of office leases in New York didn’t renew, one-fifth had a backup in the works (a number that’s bolstered by the effects of NYC rents being down 1 to 2%.

Moody’s analysts David Salz and Thomas LaSalvia noted that more data is needed to make definitive predictions on reduction or relocation. Some non-renewing tenants may have taken new space elsewhere in the market, for example. But they maintain the data will continue to shed light on the ever-evolving office market, particularly as COVID wanes, and will suggest which portions of the CMBS sector might be most influenced by office tenants swapping space instead of staying put.

This is yet another data point being watched by landlords, even those who don’t have loans tied up in CMBS. A recent Fitch Ratings analysis, as another example, ran various stress scenarios to determine how telework would impact demand, rent and net cash flow on office CMBS transactions and found that even under a moderate stress scenario in which employees will work remotely 1.5 days per week, it would still result in a 10% decline in office space demand.

“The shadows cast by the pandemic have reached all CRE sectors, but the uncertainty surrounding the future of the office sector is arguably the largest,” Salz and LaSalvia write in the report. “Whether looking at the variety of surveys focusing on CEO sentiment or searching headlines for anecdotes, the results for office survival are mixed. For every firm that commits to remote work, another claims the value of the office for cultivating innovation and firm culture.”