Colliers: Office Market Recovery Pauses

Colliers, Toronto, reported the office market paused in the first quarter following two quarters of occupancy gains. But the overall trend points toward stabilization, the firm noted.

“The U.S. office market is at a critical juncture,” Colliers’ Office Market Outlook report said. “Following close to two years of pandemic-driven correction, signs of stabilization emerged in the second half of 2021, with positive net absorption for two successive quarters. However, the market took a pause in the first quarter.”

Colliers reported office absorption fell to -534,000 square feet, pushing the vacancy rate up 20 basis points to 15 percent. “[But] these modest changes are not seen as indicative of a downturn in the market. Stabilization is set to continue as more employees return to the office in the second and third quarters,” the report said.

Colliers noted sublease space contributed to the vacancy increase. Available sublease space increased from less than 200 million square feet in late 2021 to 208.6 million square feet on March 31. “As firms evaluate their post-COVID real estate needs, sublease space will remain a cost-competitive, short-term option until there is greater clarity on business and economic direction,” the report said.

Eight office markets posted more than 500,000 square feet of positive absorption in early 2022, led by Seattle (1.2 million square feet) and Silicon Valley (1.1 million square feet). Houston and south Florida both posted close to 900,000 square feet of positive absorption. San Francisco took the hardest hit with 1.5 million square feet of negative absorption.

Office construction activity has slowed, the report said. There are 121.9 million square feet currently underway, down 25 percent from the cycle’s peak 2020 peak of 164 million square feet.

Colliers said it anticipates further stabilization in key fundamentals, with some in-demand markets achieving early-stage growth toward the end of the year. Office occupancy has ticked up to 42 percent and will increase as more firms return to the office. But this does not mean all employees will be back in the office five days a week, the report said. “Some degree of remote working is here to stay,” the report said. “However, given existing lease commitments and the time it will take to achieve optimum workplace solutions, any structural changes will take several years to fully play out.”