The Office Accordion Effect
On Saturday night the local Greek hall held an event. The sound of the piano accordion reminded me of the theory we developed in San Francisco in the early 1990’s about how CRE tenants moved in and out of the Financial District (CBD) office market.
When vacancy was low and rental rates increased, CRE tenants moved out of the CBD to fringe and suburban markets. When vacancy increased and rental rates came down, many returned to the CBD – in and out – the accordion effect. All major cities have experienced this.
In the mid 1980’s, Sydney’s CBD office vacancy stood at 3%. Rents were escalating and this started the search for cheaper markets, and particularly for back-office operations. Multinationals joined the search as they were used to much less expensive office accommodation in their home markets. This led to the boom of the late 1980’s.
In the early 1990’s the office markets crashed, and vacancies soared. Rents fell and incentives were born. With real tenant demand still very low and massive competition for tenants, new buildings had to strike terms in the $200’s psmpa net effective range (face rents were $500 psmpa net +). The soft market allowed tenants to return to the CBD.
So far in 2023, the market is soft and yet very expensive. As CRE tenants tighten their belts, they will seek cheaper alternatives. With real tenant demand still very low it will be interesting to see what unfolds. One thing is for sure, the back-office won’t be playing the same role as before because, the new laptop class is working from home.