Leasing activity in the financial services sector is gradually shifting back to major cities, although not at the same pace as before the pandemic. According to a recent analysis by Jones Lang Lasalle Inc. (NYSE: JLL), gateway markets such as Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C., accounted for 43.6 percent of financial-services office leasing activity in 2022 and the first quarter of 2023. This is an increase from 33.9 percent in 2020-2021 and 42.1 percent in 2019.
However, growth markets, which had been gaining a larger share of financial-services leasing in recent years, saw a decline. These markets, including Atlanta, Austin, Charlotte, Dallas, Miami, Nashville, Phoenix, Raleigh, and San Diego, accounted for 21.3 percent of office leases in the financial services industry in 2022 through Q1 2023, down from 26 percent in 2020-2021 and 24 percent in 2019, according to a report in The National Observer.
The remaining markets represented 35.2 percent of financial-services leasing activity in 2022 through Q1 2023, down from 40.1 percent in 2020-2021 and 34 percent in 2019.
Although gateway markets are experiencing a resurgence in leasing activity from banks and insurance companies, it has not reached the same level as before the pandemic. Financial-services organizations have leased 29.4 million square feet of office space in the past year, a 16.8 percent decline from 2019 levels.
The real estate strategy in the financial industry varies widely, with firms maintaining expense discipline while considering their real estate needs. Lease terms have been gradually increasing across the industry since the pandemic. Financial services firms are currently grappling with integrating innovation and technology like artificial intelligence into their business strategies, including real estate, while also focusing on cost-cutting due to the economic slowdown and financial pressures caused by interest-rate hikes.
Companies in the finance sector are increasingly emphasizing the creation of attractive gateway hubs to attract talent. However, there is still a desire to locate in lower-cost markets. The pandemic has highlighted the importance of scalable talent, and companies are now focused on creating magnetic hubs where employees can be highly engaged, productive and contribute to innovative goals.
Another commercial real estate firm, Savills PLC, has observed a similar slowdown in leasing activity in the finance, insurance, and real estate (FIRE) industries. In Q2 2023, FIRE leasing activity totaled approximately 3.1 million square feet nationally, the second-lowest level since the pandemic. Notable office leases within the financial services industry often represent space reductions or subleased opportunities from tenants that have downsized their footprints due to the pandemic.
Despite the overall slowdown, there have been some expansions. For instance, investment firm KKR & Co. Inc. signed a lease for 219,395 square feet at Hudson Yards in Manhattan, and Ares Management Corp. leased 206,000 square feet in Los Angeles’ Century City district. However, these expansions are relatively few compared to the reductions and subleased opportunities observed in the market.