Office Sector Woes Continue

Analysts say the pandemic shutdown and millions of job layoffs are weighing heavily on the office sector.

Cushman & Wakefield Chief Economist Kenneth McCarthy said net office absorption dropped from 5.2 million square feet in the first quarter to -22.8 million square feet in the second quarter. “Given the severe blow to the labor markets, it is not surprising that the office leasing environment was also impacted this quarter,” he said.

The Labor Department on Thursday reported 1.4 million new initial weekly jobless claims last week, making it the 19th consecutive week initial claims exceeded one million. The national unemployment rate equaled 11.6 percent for the week ending July 18.

“This was the largest quarterly decline in net demand for office space since the second quarter of 2009 during the Great Recession,” McCarthy said.

The office vacancy rate increased to 13.7 percent in the second quarter from 13.0 percent at year-end 2019, Cushman reported.

Yardi Matrix, Santa Barbara, Calif., noted many businesses are currently under hiring freezes, “so [office-using job] gains in the near term will be more reliant on the ending of furloughs than on rehires,” the firm’s July National Office Report said. “Going forward, office-using employment may be a less reliable indicator of office market performance as firms hire more remote employees.”

Much of the country is seeing substantially more coronavirus cases than when the lockdowns first went into place, Yardi said. “While leaders wary of economic damage may resist another round of shutdowns, the coronavirus may end up causing a second wave of layoffs and business closings,” the report said.

Yardi reported 26.1 million square feet of new office space delivered between January and June, nearly equally split between suburban offices and central business district/urban locations. Though some sector participants speculate that COVID-19 could make the suburbs more attractive than denser urban locations, only 29 percent of buildings currently under construction are in suburban locations, the report said.