Implications of the pandemic on the U.S. office market continue to surface in the form of subdued tenant demand, minimal leasing activity, and the rise of sublease space across markets. The office vacancy rate in the U.S. spiked following a year of diminishing demand for office space as a shift to working remote swept the country following the spread of COVID-19. Total vacant space climbed over 20% across the U.S. markets tracked by Avison Young, bringing the total inventory of vacant space to 617 million square feet at the end of the third quarter. The outlook calls for continued increased vacancy across the U.S., most of it attributable to the country’s largest urban office markets.
Across the country, direct-lease vacant space has increased by 12% year-over-year... sublease space has grown 43%.
During the third quarter, the U.S. measured an occupancy loss of more than 25 million square feet, with nearly all markets surveyed reporting negative net absorption during the period. Among major markets, New York and San Francisco have seen the largest vacancy increases to date, reporting 12.2 million and 4.8 million square foot negative net absorption, respectively.
The rise in vacancy arises disproportionately from the flood of sublease space that has hit the market since the onset of COVID-19. While direct-leased vacant space has increased 12% year-over-year across the country, sublease space has grown 43%. In San Francisco, sublease space has nearly tripled during the year and now accounts for almost half of all space available. Austin, Phoenix, Las Vegas and Nashville have all watched sublease space virtually double since the beginning of the year as tenants re-evaluate their occupancy strategies.
The dip in occupancy has come at a time when tenants were already beginning to rethink their workplace strategies. Driven by an increased focus on space utilization, many occupiers moved to unassigned hot-desks and hoteling embracing the open office concept, with its shift away from traditional private cubes and offices. Both these trends have pushed down the average square footage needed per employee. The pandemic-induced adoption of large-scale remote working may well push this even further.
Since the onset of the pandemic U.S. office using tenants have undergone a massive shift to working remote. Most workers continue to do so even though many cities have eased restrictions and allowed for tenants to reoccupy space. By some estimates, only about a quarter have returned to the office, and many companies have allowed for such flexibility going well into 2021. Until people have greater confidence to gather (for example, when a vaccine is approved and made widely available), it is unlikely companies will return to full occupancy. When they do return, remote working will have altered how tenants think about the role of the workplace, which is likely to reshape the office market for some time.
The dip in occupancy has come at a time when tenants were already beginning to rethink their workplace strategies.
The same forces causing the observed increase in vacancy—weak demand, increased sublease availability, and uncertainty—will also put downward pressure on asking rents in the office sector. As vacancy rose over the summer, landlords initially held base asking rents steady, offering increased incentive packages instead. However, this strategy proved unsustainable. Asking rates trickled down by an average of 3.6% during the year, and this trend should only accelerate into 2021.
Market fundamentals in the office sector are unlikely to recover until at least the second half of 2021. Demand and leasing volume will remain subdued until the U.S. can successfully supress the spread of the virus and job growth brings unemployment closer to pre-COVID levels. This recovery will be uneven. Among the pandemic’s many effects has been the disruption of demand for public transportation. Many densely populated CBDs rely on mass transit and cannot support the parking requirements necessary to bring in a workforce that drives to the office. Inventory in the suburban markets, by contrast, typically offer higher parking ratios. Because of this, look for suburban markets to fare better in the near term than dense urban markets, which have been hit especially hard.
The same forces causing the observed increase in vacancy—weak demand, increased sublease availability, and uncertainty—will also put downward pressure on asking rents in the office sector. As vacancy rose over the summer, landlords initially held base asking rents steady, offering increased incentive packages instead. However, this strategy proved unsustainable. Asking rates trickled down by an average of 3.6% during the year, and this trend should only accelerate into 2021.
Market fundamentals in the office sector are unlikely to recover until at least the second half of 2021. Demand and leasing volume will remain subdued until the U.S. can successfully supress the spread of the virus and job growth brings unemployment closer to pre-COVID levels. This recovery will be uneven. Among the pandemic’s many effects has been the disruption of demand for public transportation. Many densely populated CBDs rely on mass transit and cannot support the parking requirements necessary to bring in a workforce that drives to the office. Inventory in the suburban markets, by contrast, typically offer higher parking ratios. Because of this, look for suburban markets to fare better in the near term than dense urban markets, which have been hit especially hard.
Since the onset of the pandemic U.S. office using tenants have undergone a massive shift to working remote. Most workers continue to do so even though many cities have eased restrictions and allowed for tenants to reoccupy space.
