Murky Outlook for Office Sector

February 10, 2021 |By msorhan-msorhan@mba.org

The U.S. office sector faces a “murky” future after a tumultuous 2020, said Yardi Matrix, Santa Barbara, Calif.

Nearly 68 million square feet of new office stock delivered last year despite the recession and pandemic stay-at-home orders that halted construction in many markets during the second quarter, Yardi’s CommercialEdge National Office Report said. The national vacancy rate increased to 14.2 percent.

“Rollout of the COVID-19 vaccine is progressing more slowly than initially hoped, signaling that any return to normalcy won’t occur until well into the second half of the year,” Yardi said. “Even though the vaccine provides optimism that companies can eventually return to the office in large numbers, many firms have spent the last 10 months reevaluating exactly how much office space they need and if they can continue with most workers in a remote setup ad infinitum.”

Yardi reported nearly 165 million square feet of office space currently under construction, mostly in A or A+ properties.

But new deliveries could have some trouble finding tenants. Stephen Newbold, National Director of Office Research for Colliers International, Toronto, said U.S. office absorption fell once more in the fourth quarter after a major drop in the prior six months, “as the resurgence of the COVID-19 pandemic and subdued market activity placed an even greater toll on the sector than in the preceding two quarters.”

National office absorption totaled negative 40.9 million square feet in the fourth quarter, the second-lowest total on record, Newbold said.

“Looking forward, the availability of two vaccines, with more set to follow, provides reason for measured optimism once the U.S. achieves herd immunity and there is greater confidence in returning to the office,” said Newbold. Once this occurs, economic and business confidence should improve, resulting in reduced office market volatility, he noted.

“The sector looks set to remain challenged through 2021, but we could see signs of stabilization as we move into 2022,” said Newbold.