“The greatest danger in times of turbulence is not the turbulence – it is to act with yesterday’s logic”. – Peter Drucker 

‘Times of turbulence’ is an accurate descriptor for the current state of the corporate real estate market which is having to adjust to the shift in office usage since COVID-19 and rapid interest rate hikes.  The related uncertainties and increased borrowing costs put downward pressure on CBD asset values as the cost of financing mortgages and developments increases and access to finance becomes more difficult.  Evidence of corporate real estate distress is becoming increasingly common across the Western world with major landlords such as Brookfield defaulting on loans tied to Los Angeles skyscrapers.
 
In these circumstances, much of the commentary is understandably focused on the supply side as current and future investors in CBD real estate are forced to adapt their investment strategies to align with current realities.  As always, in times of turbulence, there are opportunities, with increasing investor attention being given to acquiring distressed CBD assets at a discount to book value, with the ability to inject finance together with a roadmap for repositioning the acquired asset.
 
Far less focus is being given to the demand side as commercial occupiers face the same set of uncertainties, with many tenants constrained in their response to the ‘turbulence’ by existing lease arrangements with expiries sometime in the distant future. It is in the interests of tenants to consider that the opportunity to effect a step-change in leasing norms has never been greater, for turbulence creates such opportunities. While the level of incentives granted by landlords to attract tenants has always increased or decreased in response to changes in supply and demand, the extent and complexity of the current CRE uncertainties are conducive to a significant change in lease norms, with lease terms that are more flexible and more supportive of tenant enterprise.  The current opportunity to bring about change should not be missed by tenants.  As Peter Drucker said, “The greatest danger in times of turbulence is not the turbulence – it is to act with yesterday’s logic”.