‘A Relative Holding Pattern’ For Offices

The office market has seen less deterioration during the pandemic recession than it did during the Great Recession, but it’s not out of the woods yet, reported Moody’s Analytics REIS, New York.

The national vacancy rate for the office sector reached 17.7 percent in late 2020, a 90 basis point full-year increase. By comparison, vacancies rose by nearly 200 basis points in 2008, followed by a 250 basis point increase in 2009, said Moody’s Analytics REIS Head of Commercial Real Estate Economics Victor Calanog. He noted the national office vacancy rate did not top out until late 2010 and increases added up to 500 basis points before starting to gradually decline in 2011.

“That means the true impact of this downturn will likely transpire this year,” Calanog said. He said the office market is in “a relative holding pattern” at the moment. “Forecasts suggest that given typical lags, vacancies for the office sector will continue to rise even after the economy begins growing at a consistent rate,” he said. “But few things about this downturn can be called ‘typical,’ and our current outlook suggests that vacancies will incur its largest increase this year.”

REIS forecasts the office sector will remain under significant pressure in the intermediate and long-term horizon. “There remains much talk about employers reevaluating their office space needs, depending on what the post-pandemic world looks like,” Calanog said. “But the decision may be pushed off till late this year or next year and beyond, just as large employers like Google have been pushing off any dates as to when they plan to reopen offices in the worst hit U.S. cities to at or around September of this year from the estimated month of June a few months ago.”

The following years, 2022 and 2023, will likely see “marginal” increases as employers sort out how remote work and any return to the physical office post-pandemic will truly shake out and impact their needs for office space, Calanog said.

Rebecca Rockey, Head of Economic Analysis & Forecasting with Cushman & Wakefield, agreed. In a Cushman new office rent forecast, she noted previous recessions have shown that national office asking rents generally do not decline until four quarters after vacancy begins to increase. This might be happening again, as overall and Class A office asking rents ended 2020 up 5.6 percent and 3.8 percent year-over-year, respectively.

“This delay means that office tenants, or occupiers, can be patient in their plans to optimize opportunities in many markets,” Rockey said. “Following the conclusion of the past two recessions, the Dot Com recession and the Great Financial Crisis recession, no U.S. markets hit their overall rent trough within a year. In fact, only a third of markets hit rent bottoms within the first three years.”

But Rockey called history a guide, not a predictor. “While the timeline of rent declines varies by market, the pattern is consistent,” she said. “However, the depth of the pattern can vary widely. The variance among the top 10 most volatile North American markets has historically been nine times that of the 10 least volatile markets.”

Timing the market in those more volatile locations can pay significant dividends for occupiers, Rockey said. “As an example, gateway markets–which also have higher asking rents than the national average–have historically experienced rent declines twice as sharp as those in secondary and tertiary markets,” she said. “The economic recession that commenced in Q1 2020 was unparalleled in its timing and the depth of the job losses. Given that, it is likely that many [office] markets will fall more precipitously.”