Here’s a quiz. What do GEICO, Publishers Clearing House, Dealertrack, Hains Celestial, Allstate, Marchon Eyewear, Equitable Advisors and Newsday have in common?

If you guessed that they are among a growing list of major companies looking to shed a sizeable amount of Long Island office space, you’d be correct.

Ever since the COVID-19 pandemic forced firms to allow employees to work remotely in the spring of 2020, companies have been trying to figure out how to navigate the new hybrid work environment. And though most businesses would rather have workers come into their offices, attracting and retaining employees in this period of high employment has prompted firms to continue to offer the option to work from home.

As a result, companies have been re-thinking their real estate requirements, and more firms are seeking to shrink their office footprints by subleasing or selling some of their existing space.

GEICO is doing both. The insurance giant had a deal to sell its 235,635-square-foot office building on 20 acres in Woodbury to a N.J.-based private equity and development firm last fall, but the sale fell through after the buyer’s plan to redevelop the site into a 24-hour logistics center ran afoul of Town of Oyster Bay covenants.

At the same time, GEICO leased 200,000 square feet at The We’re Group’s office complex at 1 Huntington Quadrangle in Melville, where it planned to relocate in the fourth quarter of 2023. However, the Chevy Chase, Md.-based company, a wholly owned subsidiary of Berkshire Hathaway, has recently put the Melville space out for sublease and Cushman & Wakefield is once again marketing GEICO’s Woodbury office property for sale.

The sale and sublease represented a major downsizing of the company’s Long Island office space, as many of its employees continue to work remotely. GEICO did not respond to requests for comment on its real estate plans.

Though brokers acknowledge the increased availability of sublease space, they point out that the overall Long Island office market is holding its own, buoyed by high employment and a finite supply of Class-A space.

“Excluding sublets, Long Island office market fundamentals remain relatively stable,” says Adam Rochlin, principal of The Rochlin Organization brokerage firm. “While many national office tenant employees may still be working from home, the rent for office space is still being paid, and leases can run for many years. Landlords are not feeling the pain of vacant space, and they’re not desperate.”

The overall vacancy rate for Long Island office space was 13 percent in the second quarter, with available sublease space accounting for 20 percent of all office vacancies, according to a report from Cushman & Wakefield. Supply of office space here has outpaced demand for the last 11 quarters, and there was negative absorption of 566,000 square feet in the first half of 2022.

Rochlin said while sublet space is abundant, it’s difficult to conclude a deal with.

“We often refer to the national sublet market as ‘shadow space,’ and it can be riddled with landmines at every turn, including the possibility of a master tenant default, that could terminate sublet tenancy, and unanswered complaints that can make tenancy uninhabitable. Tenants tend to stay away from such liability unless the discount is significant.”

Brian Lee, a principal and executive managing director of Newmark, says there has been a flight to quality for Long Island office tenants and noted that Class-A office properties have much higher occupancy rates, while most of the available sublease space is in less desirable buildings.

“I think the main punishment here is going to be in Class-B buildings, the commodity space that doesn’t have the amenities, that’s old, that’s tired,” Lee said. “That’s where you’re going to see the problems. When you look at the buildings that are being sublet, you’re not looking at the A buildings, you’re looking at the B buildings.”

In fact, there was about 600,000 square feet leased at Long Island Class-A office buildings in the second quarter, while just 212,000 square feet was leased at Class-B buildings, according to the C&W report.

Overall asking rents for Long Island office space rose to $32.06 in the second quarter, and David Pennetta, executive managing director for Cushman & Wakefield Long Island, said the strength of office rents is a sign of landlord confidence. It also reflects the area’s finite supply of desirable office space.

“The last speculative office building over 100,000 square feet developed in Nassau County was constructed in 2005 and in Suffolk County it was 2009, so we don’t have any new supply to absorb,” Pennetta said. “Also, the medical sector has consumed a steady supply of office space, further shoring up its resilience. With the amazing strength of the industrial sector, we have even seen some major office buildings being converted to distribution warehouses.”

Still, with softening demand and increased supply of sublease space, the Long Island office market remains in a state of flux. For clients of CBRE broker Martin Lomazow, a tenant-rep specialist for large office transactions, that represents opportunity.

“We are having a very good time representing our clients looking for space, because there’s ample space to choose from. That makes this a very good time to be in the market as a tenant,” Lomazow said. “Plus, if you have a strong enough tenant, you can often convert sublease space to direct leases.”

And though some stats shine a positive light on the office market, Lomazow believes the systemic office-occupancy issue will become more apparent over time.

“At least half of larger companies are going on record that they’re going to be reducing their footprints and that’s nationally,” Lomazow said. “You also have the possibility of a looming recession, and when companies are confronted with a decision whether to give up space or employees are going to be far more inclined to give up space, since it’s proven that they can exist with a reduced footprint.”

Many brokers say the work-from-home trend is not universal and seems to be most prevalent with certain types of businesses.

“Process-driven work, which doesn’t require creativity and collaboration, is ideal for working from home. You’re typically on your computer processing information, whether it’s processing orders, claims, or other functions,” Lee says. “Bigger corporations have more of that process-oriented work. When people need to do collaborative work, like lawyers, accountants, and other creative professionals, that is more of an environment where people want to work together and need to be together, and you can’t just do it on Zoom all the time.”

Pennetta agreed with that assessment.

“Certain industries are more compatible with working from home, but there is no one-size-fits-all solution as each company will look different depending on its objectives,” Pennetta said. “I personally think having younger professionals working unguided and autonomously by themselves could lead to cultural issues and result in the younger workforce changing jobs more often.”

Meanwhile, out of all of Long Island’s commercial real estate sectors, the office market remains the one with the most question marks and uncertainty moving forward. And it’s major events like COVID that can move the needle one way or the other.

“Before 9/11, everyone was looking to create corporate campuses. Then 9/11 happened and everyone wanted to disperse and, 10 years later, they all moved back to the city,” Lee said. “To me it’s a fascinating time to see what the future of work is going to be, what people are doing. I think the office is far from dead. I think whenever the pendulum goes one way, everyone says it’s never coming back. Of course it will, but to what extent remains to be seen.”

Article: https://libn.com/2022/08/11/shaving-space/