David Marino says he’s seen his fair share of highs and lows in the commercial property market. As the senior executive vice president of Hughes Marino, a company he also co-founded, Marino says the COVID-19 pandemic has, in many ways, forever altered the commercial real estate leasing market.
The commercial construction industry in the United States has been growing at a consistent pace since 2010, according to statista.com, and in 2021, $91 billion worth of commercial real estate was constructed in the United States. But the old adage, “If you build it, they will come,” didn’t quite work. Mandatory office closures at the start of the pandemic in 2020 slammed the brakes on that growth. Ever since, there have been major shifts in the supply and demand for office space.
According to Kastle Systems, thousands of offices in 10 major cities show an average occupancy rate of 37.8% in late November 2022. Since 2020, open subleases are also rising. In San Francisco, there is 9.15 million square feet of office space on the market for sublease this month, and at the end of Q3 there were 8.7 million square feet available. That equates to about 100,000 square feet of office space being tossed back on the market for sublease every week in San Francisco. It’s also can create an unfair situation for unsuspecting tenants who are at the mercy of landlords refusing to lower their asking price on rent.
How Hughes Marino Is Helping To Level the Playing Field
As a tenant representation company, Hughes Marino is one of the few companies that expanded during the pandemic. The San Diego-headquartered company has offices throughout the United States in cities such as Seattle, Denver, and San Francisco. Its latest locations include Boston and the Raleigh-Durham area of North Carolina, where the life science industry is thriving.
Marino says his company has grown with intention and there’s a formula to what it does.
“We’re just thinking about being good listeners. Let’s ask great questions,” he explains. “And then let’s go to the market to uncover all of the alternatives and create a robust negotiation and create an auction environment for that tenant and their credit and their size to get the best deal for the tenant.”
Considering that there is no industrywide regulation protecting lessees, Marino says that even the commercial real estate trade groups, like the Building Owners and Managers Association and Building Industry Association, are set up to serve landlords in the industry. “There’s no organized trade group looking out after the tenant,” he adds.
It’s another reason he says Hughes Marino’s approach of focusing on the tenant is a game changer in the market.
Fixing How Brokers Enter Deals
While landlords are steering price increases, Marino says it’s only natural brokers get a piece of the action too. Despite most brokers going into deals with no plans to engage in unethical acts, financial incentives to do so can sometimes sway brokers.
“You’re always going to give your landlord client a last look,” Marino says. “The problem is when you have the opportunity to make hundreds of thousands of dollars more money because you put a tenant in a listing of yours where you get both sides of the fee, the economic incentives are just too strong for even the most ethical, good person to overlook.”
As lease rates climb for tenants and lease terms lengthen, Marino says the best interest of the tenant suffers again, leaving brokers and landlords with the potential upper hand. Brokers then stand to land double commissions and see their pay leaping from 40% to 80%.
Where Commercial Office Space Is Wide Open
Although some companies are offering incentives and making major efforts to encourage a return to office culture, the reality is that many American office workers simply have no plans to ever return to the office in a full-time capacity. The middle group — hybrid workers who split work hours between home and office — is the new norm. The number of people working from home has tripled between 2019 and 2021, according to census.gov.
“Work and commuting are central to American life, so the widespread adoption of working from home is a defining feature of the COVID-19 pandemic,” says Michael Burrows, a statistician in the Census Bureau’s Journey-to-Work and Migration Statistics Branch, on census.gov.
So which state ranks as the highest work-from-home state? The District of Columbia sits in the top spot with a whopping 48.3% working from home. Hybrid work is here to stay, Stanford University economics professor Nicholas Bloom tells CNBC. Although he says creative and collaborative efforts can be sacrificed, with a structured schedule, hybrid work could bring other benefits, including diversity and equity.
Washington, Maryland, Colorado, and Massachusetts are the other states in tow with the most employees working from home. Census.org also states that 2021 marked the highest number and percentage of people working from home since 2005.
Marino says this trend has caused commercial office space to reenter the market at a faster speed. It has left many company owners assessing how much real estate their business really needs to operate.
“Some people really want to come back for mentoring, communication, culture, or because they don’t have appropriate home office environments, yet others are never coming back to the office,” Marino says. “And another bulk group of people, ranging from 20% to 50%, are only coming back a few days a week or month, using a hybrid office share. Companies just don’t need as much space as they used to, given the broad change to remote working and hybrid models.”
As executive office needs continue to shift, Marino says Hughes Marino can roll with the changes and aid tenants in making the best possible decisions for their brands given the markets they’re located in. He says his firm is continuing to monitor landlords and rent rates in a largely unregulated industry.
“Landlords share information, and use the brokerage community as a fluid source of information to make sure everyone stays in lockstep,” he says. “Landlords talk and cooperate because they can and it’s in their mutual interest. No one on the ownership side wants to see a price war, as it drags them all down.”
It’s just another thing he says that has given Hughes Marino a niche edge. “Competitors are nervous and anxious about the moves we’re making,” he adds. “It’s something that our competition doesn’t really want to hear about.”