David Marino, Hughes Marino’s senior executive vice president, has been representing tenants since 1991 and has seen the gamut of industry highs and lows. A former landlord leasing agent himself, Marino says the COVID-19 pandemic initiated a whole new paradigm for landlords and tenants.
“This has been really a strange dynamic,” Marino said. “People will ask me, ‘Well, David, how can these landlords still be asking the same price as they were pre-COVID two-and-a-half years ago, yet the market’s a lot worse?’ And I say, ‘Look, you’ve got to realize that lowering prices doesn’t create demand.’”
The Wall Street Journal says more than 200,000 U.S. businesses closed during the first year of the pandemic and since then, 600,000 establishments have permanently closed per year.
Offices in 10 major cities show an average occupancy rate of 37.8% in late November 2022, according to Kastle Systems. At the same time, office subleases are up in all major United States cities since 2020.
In mid-November, there was 9.15 million square feet of office space on the market for sublease in San Francisco, and at the end of the third quarter, there was 8.7 million square feet for sublease. If this momentum continues, it could mean every week, approximately 100,000 square feet of office space is being listed on the market for sublease in San Francisco right now.
When pandemic-mandated office closures created a domino effect across the country in the spring of 2020, Hughes Marino took it in stride. Navigating through turbulent times is something Marino says his company has always been adept at. It earned its stripes powering through previous recessions and the 2007-2008 mortgage crisis.
Hughes Marino: Office Arrangements Could Be Forever Changed
Work from home trends and hybrid office setups are a new hurdle for commercial property owners.
“This inventory is coming on the market at an accelerated rate now in 2022, as more and more companies attempt to rationalize their real estate footprint needs,” Marino says. “Some people really want to come back for mentoring, communication, culture, or because they don’t have appropriate home office environments, yet others are never coming back to the office.”
Marino further explains the cold hard truth about the situation and how landlords are aiming to stabilize their own economies since it remains unregulated.
“Landlords share information and use the brokerage community as a fluid source of information to make sure everyone stays in lockstep,” Marino says.
Marino points out that it’s in landlords’ interest to maintain communication to avoid price wars.
Lingering landlord legal woes are no secret. Therealdeal.com says seven class action suits have been filed against RealPage, a software company that made an algorithm to help landlords determine the highest possible rents, since Oct. 18.
Therealdeal.com also states each of the lawsuits alleges anti-competitiveness, with violations of Section 1 of the Sherman Antitrust Act, which “sets forth the basic antitrust prohibition against contracts, combinations, and conspiracies in restraint of trade or commerce.”
In a lawsuit filed in the Southern District of California in mid-October, a group of renters accused nine large landlords of using third-party pricing software as a way to conspire and keep rents inflated.
It turns out that the software business RealPage, which created the YieldStar algorithm, was being used by the landlords to take real-time availability of rental inventory and compare it to the pricing in nearby buildings to suggest an ideal price for the landlords: not too high to price them out of the market, but not too low.
“Machines quickly learn the only way to win is to push prices above competitive levels,” University of Tennessee law professor Maurice Stucke told propublica.org.
The lawsuit states that the company advertises that it can “drive rental rate improvements, every year, between 5% and 12% in every market.” However, if landlords allegedly do this across America, it could cause pricing catastrophes. In addition, the lawsuit claims that RealPage’s information on available inventory allows landlords to keep an optimum number of properties vacant to avoid oversupply and as a result, hike increase prices.
Landlords Continue To Face Never-Before-Seen Challenges
Marino says when COVID struck in 2020, landlords huddled together and made an unofficial pact not to lower prices. Although markets such as Boston, San Francisco, and Raleigh-Durham, North Carolina, are booming thanks to life science-related sprawl, Marino says most landlords aren’t doing well right now and brokers play a part in the equation, too. He says the situation can get dicey.
“The problem is when you have the opportunity to make hundreds of thousands of dollars more money because you put a tenant in a listing of yours where you get both sides of the fee, the economic incentives are just too strong for even the most ethical, good person to overlook,” he says.
Marino says it typically means higher tenant costs and longer-term leases, which tenants don’t traditionally want.
Still, Hughes Marino remains at the forefront of overseeing commercial property leases. Genuinely listening to clients has given Hughes Marino an advantage in the commercial property arena, he explains.
“If you are competing for tenant business, it is a competitive advantage to represent tenants and it has become a niche specialty,” Marino says. “A lot of landlords like how we approach the process, as it’s always a fair fight. We also do a lot of lease renewals, and we have no financial incentive to move a tenant unless the current landlord cannot accommodate the requirement or be competitive.”
With more than 30 years of industry experience, Marino says he believes Hughes Marino can continue to be a changemaker in the commercial property sector.
“The landlords and the brokerage community have all the power,” he says. “That is why we are building what we are building.”
Hughes Marino continues to stay on a steady growth trajectory with 10 offices in major cities throughout the country including Seattle, New York, Los Angeles, San Francisco, Denver, New York, Boston, and Raleigh-Durham.
“People see what we’re doing,” Marino concludes. “Competitors are nervous and anxious about the moves we’re making.”