Pandemic Reaching Office Market

The next 18 months could be a difficult period for the office sector, said Moody’s Analytics REIS, New York.

Office metrics tend to lag the overall economy in part due to the sector’s relatively long lease lengths. A recent study found the average term for a 100,000-plus-square-foot office lease exceeded 12 years. Therefore, distress could appear in different ways depending on the performance metric, said REIS Head of Commercial Real Estate Economics Victor Calanog.

“We might not see definitive evidence of a decline in demand for office space until much later, if at all, despite widespread speculations about how remote working is likely to have a lasting impact,” Calanog said.

Yardi Matrix, Santa Barbara, Calif., reported the national average asking rent fell 25 cents in September from the previous month to $38.07, a 0.5 percent decrease from the same period last year. The national office vacancy rate increased 30 basis points month-over-month to 13.6 percent.

Yardi said employment in office-using sectors continued a modest recovery from the initial downturn in the spring. In April, 2.7 million jobs disappeared in Information, Financial Activities and Professional and Business Services as COVID-19 lockdowns hit. In the five months since then, those sectors averaged 207,000 new jobs per month. In addition, office-using sectors have consistently outperformed overall job growth for several years, which has continued during the pandemic. Office-using employment was down 4.8 percent year-over-year in September compared to for a 6.4 percent drop the labor market as a whole.

Looking forward, Calanog said REIS forecasts that asking and effective rents could decline by 7.2 percent and 11.7 percent, respectively, over the rest of 2020 and 2021. Both figures would be record amounts.

“Even if the long-term nature of leases in the office sector offers some stability in performance metrics, distress will likely manifest more quickly in other performance metrics like how subleased space is performing,” said Calanog.

Moody’s Analytics REIS also tracks indicators such the vacancy rate at which newly constructed properties hit the market and how quickly they stabilize to prevailing submarket vacancy levels. “Already we are seeing new office space hitting the market at almost twice the vacancy rates from last year,” Calanog said, noting the average vacancy rate for newly constructed properties hovered between 27.6 percent and 30.1 percent last year and that range is up between 44.1 percent and 45.2 percent.