Office Market Seeing Nascent Recovery
Activity in the 12 largest U.S. office markets indicates many have started their recovery from the pandemic-induced downturn, reported CBRE, Dallas.
“Office-market demand is beginning to turn the corner, though the recovery will be a slow one,” said Nicole LaRusso, CBRE Senior Director of Research & Analysis. “The indicators of demand tracked by these indices are the drivers of improvement in the overall market and ultimately will factor into improvement in broader measures such as occupancy and lease rates, which will be slower to recover.”
The new CBRE Pulse of U.S. Office Demand report tracks the office market’s recovery by studying three factors: companies actively seeking office space, finalized lease agreements and sublease availability.
LaRusso identified Boston and Los Angeles as the markets farthest along in their recovery as of July. The next tier, Dallas-Fort Worth, Seattle and Washington, D.C., show “modest improvement,” she said. Another five markets show early signs of improvement: Houston, Atlanta, Manhattan, San Francisco and Denver.
A national view of the indices reveals the nascent recovery, CBRE said. For each of the three metrics, a 100 reading equals pre-crisis conditions seen in 2018 and 2019.
CBRE said its Tenant-in-Market metric, which tracks companies actively seeking office space, has increased for six consecutive months. The measure, which fell to a low point of 71 in January, reached 88 in July. “The Tenant-in-Market gains foreshadow possible leasing gains for many markets later in the year or early next,” CBRE said.
The Leasing Activity Index rose to 71 in July, up from its low of 52 last December, CBRE reported. Los Angeles, Seattle, Atlanta and Boston registered the biggest gains relative to pre-crisis activity levels. Other markets have seen moderate gains, with Houston, Washington, D.C., San Francisco, Dallas-Fort Worth and Manhattan now having regained more than half of their pre-crisis leasing levels.
The Sublease Availability Index remains high, though it edged down one point in July to 194, CBRE said. The index’s rise has slowed this year to a 2 percent monthly gain from 6 percent monthly in 2020. Six markets came in below the average for this index in July: Houston, Washington, D.C., Dallas-Fort Worth, Los Angeles, Boston and Chicago. Manhattan was at the average for the month.
Yardi Matrix, Santa Barbara, Calif., said many office landlords are offering concessions and amenities to lure companies into signing leases rather than lowering rates to attract tenants. The firm’s August National Office Report said full-service equivalent listing rates have been virtually unchanged nationally since the start of the pandemic, increasing just 1.0 percent between February 2020 and July of this year. “With the delta variant pushing back the beginning of a return to normal, it will be worth seeing whether landlords can stick to their guns on this,” the report said.
Julie Whelan, CBRE Global Head of Occupier Research, noted various factors including the Delta variant of COVID-19 have hampered both the economic and office market recoveries as well as companies’ plans to return to normal office occupancy. “We might see an influence on the indexes in August or September from companies opting to delay their full return to the office,” she said. “But there is some cause for optimism due to early signs that the recent virus resurgence may be peaking.”
