A depressed market outlook remains the norm in the national office sector. Larger tenants are seeking to reduce their footprints as employees push back on employers' return-to-office strategies (see figure 2). There is a fundamental question regarding whether the five-day work week will return as a default model. Some urban sub-markets, such as Hudson Yards in New York City (NYC) and Fulton Market in Chicago, have shown resiliency due to flight-to-quality trends favoring new state-of-the-art buildings, while others where larger, older office buildings dominate, have recent record high availability.

While many landlords are upgrading their office building amenities to make working in the office more appealing to their tenants, many older, functionally obsolete office buildings in dense urban areas are likely to be demolished or converted into alternate uses (see figure 3).

Tenants are requiring greater flexibility by seeking shorter lease terms, expansion and contraction options, and early termination rights. Landlords are increasingly granting concessions to fill vacant offices but are placing conditions on certain rights, such as requiring the tenant to pay its unamortized lease concessions if the tenant terminates the lease early. Smaller tenants (typically occupying less than 30,000 square feet) are seeing greater opportunities to secure more favorable lease options, including renewal options and expansion and contraction rights. This is due to softening market conditions resulting from low demand with more space becoming available following relocations and downsizing by larger tenants.

Landlords may be reluctant to offer too much flexibility because short-term leases increase uncertainty around occupancy and cash flow. Landlords prefer to offer greater rent incentives, such as rent abatement and tenant allowances. This allows them to stay closer to the traditional norms that provide for long-term cash flow and an improved financing outlook.

Office tenants are increasingly focused on air quality, wellness benefits, and environmental, social, and governance (ESG) standards. Tenants want to point to healthy and mindful environments, and landlords increasingly need to provide these aspects in their buildings to be competitive. Office spaces that similarly focus on mindful environments and ESG standards are better at attracting tenants and their employees to the workspace. Many tenants try to negotiate leases that provide staged-in environmental and sustainability criteria for older buildings, such as the installation of low-flow water fixtures, lighting timers, and climate controls, to reduce the building's energy usage. Tenants negotiating leases in new buildings expect those buildings to meet LEED platinum or gold level certification.

Whether the landlord or tenant is ultimately responsible for the cost of these initiatives remains at issues. Tenants want to exclude these costs from operating expenses or include the costs as part of the landlord's base operating expenses. Landlords want these expenses to be passed along to the tenant. The outcome of these negotiations depends on the size of the space being leased and the financial strength of the tenant.

Tenants are also increasingly seeking buildings and spaces offering various amenities focused on younger employees. Sweeping views, outdoor spaces, natural construction materials, coffee (and sometimes liquor) bars, ping pong and pool tables, and in-house catering are common requests in proposals by tenants. Many tenants are using these amenities to promote greater in-person engagement to achieve something close to the traditional five-day in-person workweek.

Regional relocations have also trended higher, as even major NYC developers, such as Related Companies, are placing more emphasis on the California and Florida office markets. Other developers, such as Hines, Trammell Crow, and Sterling Bay, are expanding their presence in the Austin, Dallas, and Nashville markets.

Some reports estimate that the value of offices in NYC may diminish by $50 billion due to expiring leases not being replaced or being replaced with lower rent leases. Another major NYC developer, Vornado, has put at least a temporary hold on a planned mega-development at Penn Station that has been spearheaded by New York Governor Kathy Hochul. Landlords in regions that are negatively impacted by these office relocations are offering incentives, such as rent abatement and tenant allowance, to attract prospective tenants.

Traditional force majeure clauses in office leases allowed tenants to close their offices in response to a governmental mandate without repercussion but did not allow them to abate rent. Accordingly, while many office tenants found that they can have certain portions of their employees work remotely, the earnings derived from employees working remotely often falls short of covering rent.

Office tenants frequently sought rent abatements or deferrals, which even if granted, usually came with a price. Landlords offered payment plans with interest or conditioned abatements on tenants agreeing to extend the lease term, often with an artificially higher rental rate near the end of the extended term to offset the initial loss. However, now tenants are focused on negotiating the force majeure clause in their leases to address pandemics and tenants' rights to offset rent if offices are shut down.

Landlords of urban high street and core suburban markets have leverage due to low supply resulting from a lack of construction, so rents are being pushed upward with longer-term leases. However, many traditionally busy tourist-driven areas, such as Madison and Fifth Avenues in Manhattan, Union Square in San Francisco, and Michigan Avenue in Chicago, continue to have large blocks of vacant space with reduced demand.

Whether due to climate or financial considerations, the US has seen a major population shift from major Northeastern and West Coast cities to the South and Southeast, particularly the states of Florida, Georgia, Tennessee, and Texas. The cost of retail and labor shortages has similarly driven retail from Northeastern and West Coast cities to neighboring suburbs. Suburban malls are also gaining interest as stores are looking to be closer to customers who are working from home.

Before the COVID-19 pandemic, most force majeure clauses did not include references to pandemics, epidemics, and similar public health crises. Currently, retail tenants are focusing on expanding the force majeure clause during lease negotiations to better address these events. Retail tenants want the ability to abate rent if their premises are shut down due to a public health crisis because a closed store does not produce revenue.

The COVID-19 pandemic shifted the way consumers shop. Digitally influenced retail sales, where consumers research products online but buy or pick up in stores, continue to rapidly increase (see figure 5). Many consumers still gravitate to brick-and-mortar stores because they can touch, feel, and experience products without the limitations that e-commerce inherently imposes. Retailers are adapting to this trend by reimagining their store size, location, layout, staffing, and technology. For example, retailers are increasing the use of product displays, adding distribution hubs for customers to pick up online orders, and expanding customer service areas to allow for more in-person shopping experiences.

Retail tenants are creatively expanding their offerings digitally and in the physical space to attract and retain customers. For example, H&M has started selling pre-owned clothing and accessories from other brands, such as Zara and Prada, in addition to its own brand. Richemont's Watchfinder brand purchases pre-owned watches and offers customers store credit that can be used at the various Richemont brand boutiques in which it has a presence (including some Cartier locations).

Retail tenants are also focusing on the permitted use clause during lease negotiations to ensure they have the flexibility needed to meet the ever-changing needs of their customers. Landlords are exploring ways to support tenants' longevity in a retail space by offering more flexible permitted use clauses but with protective mechanisms (such as allowing a tenant to change its use and trade name to include any of its affiliate brands that offer a substantially similar product) so they do not compromise their ability to retain the value of a creditworthy tenant.

The adage "everything old is new again" is especially applicable in retail. Many retailers are bringing back familiar brands to drive on-site sales. For example, Macy's has resurrected the Toys 'R' Us brand as in-store shops in many of its locations, and RadioShack express stores are now open in many HobbyTown locations. This trend is expected to continue as older generations retain wealth and seek familiar shopping patterns.

Organized retail crime is a growing problem for retailers. The proliferation of smash-and-grab retail theft, occurring mostly at high-end retail establishments, is causing tenants to scrutinize their security plans and demand more security presence from landlords. Many factors, including police shortages, changes in prosecuting guidelines, and the growth of online marketplaces, have exacerbated the problem. Landlords are enhancing their security plans by investing in security systems, video surveillance, and uniformed patrol to protect existing tenants and attract new tenants.

Retail tenants are demanding more flexibility in this uncertain retail market by seeking shorter lease terms (including pop-up leases), early termination rights (almost always based on the tenant failing to achieve a certain gross sales threshold), and the right to "go dark." Increasingly, landlords are agreeing to grant these rights if the tenant properly secures the premises and the landlord has a right to recapture the premises.

With the proliferation of online retailing and e-commerce and increased US manufacturing, industrial has become the darling sector of the commercial real estate market. Industrial locations throughout the US have seen rental rates increase by many multiples because warehouse space is needed for retail goods beyond their brand retail locations. Retail locations are generally too small to hold large amounts of inventory in storage spaces meant just for a particular store, and taking inventory from the particular store to supply online retailing would cause percentage rent problems for the retailer. Third-party logistics (3PL) companies, which help e-commerce merchants manage their supply chain, are leading demand as companies continue to increase outsourcing to avoid a lack of inventory, labor shortages, rising transportation costs, and other supply chain challenges (see figure 9).

With the ever-expanding need for industrial space, tenants have sought larger spaces and longer-term leases to lock in rental rates. With online retailing becoming increasingly prevalent, the need for greater capacity to store those online purchased goods has been steadily increasing (see figure 8).

Due to low supply and high demand in most tier 1 and 2 markets, landlords are demanding higher rents with substantially higher rent escalations (typically 3.5% to 5%) on warehouse leases.

Landlords desire to retain the building as a bulk distribution asset to optimize residual value. They often require tenants to restore building improvements made for manufacturing to warehouse use.