After years of widespread downsizings and high-profile move-outs, one West Coast landlord is pointing to the return of larger lease sizes as a sign of the national office market's accelerating rebound.
Hudson Pacific Properties, a Los Angeles-based landlord with a portfolio encompassing some of the hardest-hit office markets in the country, reported a slight uptick in the size of deals it is currently negotiating with prospective tenants. Pending agreements now average about 16,000 square feet, an increase of about 15% compared to those it reported in the third quarter of last year, the company said.
The report is welcome news as Hudson and other U.S. office owners scramble to rebuild occupancy losses endured over the past half-decade.
Growing spatial requirements "tell us that downstream we're going to get more volume, and it also tells us that there's more larger deals in the pipeline, which is exciting," Art Suazo, Hudson's executive vice president of leasing, told analysts on the company's recent earnings call. "The tours are up quarter over quarter. The pipeline is up slightly quarter over quarter. Everything we have in our pipeline is trending in the right direction."
While the pool of tenants shopping around for office space has grown over the past year, many of their signed leases remain at a fraction of pre-pandemic levels, forcing landlords to stitch together smaller deals to make up for the loss of larger commitments.
Across the country, many office landlords are contending with this new leasing reality to balance tepid, but positive, demand among companies with deal sizes that have shrunk by an average of up to 20%, according to CoStar data.
That juggling act has complicated the national office market's recovery efforts as it stumbles to backfill hundreds of millions of square feet that tenants have collectively ditched over the past decade, driving vacancy rates up to record highs.
Appetite for space
Yet with escalating in-office requirements, coupled with a barren construction pipeline, there's a growing sense of urgency among tenants looking to expand their real estate footprints amid a dwindling amount of desirable, high-quality options.
For Hudson, that returning demand for premium office space helped push the real estate investment trust's total leasing volume 20% higher in 2024 compared to the prior year.
The landlord reported more than 2 million square feet of signed deals, roughly 60% of which represented new agreements. That's the highest level of new deals since 2019 and nearly double its post-pandemic average.
"All of our markets gross leasing is reaching post-pandemic highs," CEO Victor Coleman said. "Sublease availability is improving with virtually no new construction, and therefore supply for quality office space will become constrained. While the East Coast has led in improving office fundamentals to date, we fully anticipate similar trends will emerge on the West Coast."
Hudson Pacific's office holdings are concentrated in markets such as San Francisco, Silicon Valley, Los Angeles and Seattle, all of which have some of the highest vacancy rates in the country as demand for space remains well below pre-pandemic levels. Tenants in San Francisco, for example, collectively handed back upward of 2.5 million square feet more than they signed on for in 2023, according to CoStar data, and the city's availability rate has climbed to a record high of about 35%.
Building demand and the gradual return of larger deals is fueling optimism among landlords such as Hudson, with many executives saying tenants' appetite for office space will only continue to grow — regardless of whether pandemic-related factors such as hybrid work become a permanent fixture for the recovering market.
Twilio, a software company based in San Francisco, adopted its remote-first policy in 2022 that allows all of its employees to choose where they want to work. Even so, the company recently signed a direct deal with Hudson Pacific for its headquarters at Rincon Center, space it had originally been subleasing as part of a term set to expire next month.
"We continue to be a remote-first company," a Twilio spokesperson said in a statement to CoStar News. Even so, "our corporate headquarters at Rincon Center provides Twilions with more flexibility and more opportunities for connection."
