One of the many ripple-effects of the COVID-19 pandemic is the effect it’s had on the demand for commercial office space.
In a word, it’s been pretty devastating.
The numbers are stark. According to an estimate published by Dallas-based commercial real estate services and investment firm CBRE Group, Inc., as of the end of 2020, nearly 140 million sq. ft. of office space was available for sublease across America.
That’s a 40% jump from the previous year. Not only that, it’s the highest sublease availability figure since 2003, which means the situation is worse than even during the Great Recession of 2008.
Of course, it isn’t surprising to expect that more sublet space would become available during periods of economic downturn, when many businesses naturally look for ways to cut costs. But those dynamics typically reverse when the economy picks up again. This time around, it’s very possible – even probable – that the changes are permanent.
The reason? Many companies that reduced their office space footprint in 2020 didn’t doing so because they we’re suffering financially. It was because of government-mandated lockdowns. And now they’re expecting many of those employees to continue working from home, either part-time or full-time, after the pandemic subsides.
Employee surveys have shown that many workers prefer to work from home where they can avoid the hassle and expense of daily commuting. It’s understandable that they don’t want that to change back again. In many business sectors which don’t actually need their workforce be onsite to produce revenue, companies are simply ratifying a reality that’s already happened. Accordingly, they’ve changed their expectations about employee attendance at the office going forward.
Commercial landlords are now feeling the long-term effects of this shift in thinking. Rents for prime office space fell an average of 13% across the United States over the past year. In places like New York and San Francisco the drop has been even steeper — as much as a 20% contraction.
For many of the lessees, it’s less onerous to sublease space to others rather than attempt to undertake the messy business of renegotiating long-term lease contracts with landlords. Still, there’s pain involved; sublease space historically comes with a significant discount — around 25% — but with the amount of sublet space that’s been coming onstream, those discounts may well go even deeper due to the lack of demand.
The cumulative effect of these leasing dynamics is to put even more downward pressure on broader rental rates, as the deeply discounted space that’s available to sublet puts more pressure on the price of “regular” office space. It’s a classic downward spiral.
Is there a natural bottom? Most likely, yes. But we haven’t reached it yet, and it’ll be interesting to see when — and at what level — things finally even out. In the meantime, it isn’t a very pretty picture.
What are you witnessing with regards to office space dynamics within your own firm, or other companies in your business community? Please share your thoughts below.
2 thoughts on “The consequences of COVID on office space leasing.”
Conventional wisdom has it that suburban office locations have become more popular due to the COVID-19 pandemic, potentially accelerating the urban exodus already underway in many U.S. metropolitan areas.
But according to Newmark, a commercial real estate advisory firm, available data does not reveal a significant shift away from urban cores — yet. See https://www.nmrk.com/insights/real-insights/an-office-market-in-transition-the-urban-vs-suburban-debate.
Their report says that between April and June, 2020, loss of occupancy affected ~30% of existing office space inventory in central business districts, compared to ~20% of suburban inventory. But because suburban areas collectively have more office space, ~60% of negative absorption occurred in the suburbs and ~40% in central business districts.
Newmark stresses that available data is still too sparse to conclude that an exodus toward the suburbs is definitely occurring. But, they say, “public transportation may be the key component to how quickly a market recovers … managers of properties in car-dependent submarkets are anticipating a faster recovery to pre-COVID occupancy rates. Offices in areas with a greater dependency on mass transit — whether rail, bus or a combination thereof — are anticipating a slower recovery, as commuters fear higher virus transmission potential while in transit.”
Their research indicates that “only 12% of managers of car-dependent office properties were moderately or extremely concerned about the possibility of increased teleworking among their occupiers, compared with 30% among managers of extremely-walkable (primarily urban/transit-adjacent) properties.”
One does wonder about the empty canyons of New York and San Francisco. Will many of those offices in the towers and ground level shops become apartments? Will suburban apartment complexes now be built further out into the countryside away from freeways — both permanent changes the byproduct of telecommuting? Possibly.
Surely some portion of the work force will now insist on working from home permanently. The technology proved itself during the pandemic and is improving. People needed a reason to change. Microwaves were around long before busy mothers in the workforce took to using them, after all, and now we all do. Regular cooking never totally went away, but meals at home aren’t the same as they were in 1947. Offices will be different.
Not everyone will prefer the solitude of working from home, of course, but one suspects the gregarious will find they have the freedom to show up at work — and introverts permission to hide out happily as ghosts.
Change seems to move in bursts. War is a typical catalyst. We may find similarly that major advances in our efficiency and prosperity will result from this pandemic. But “normal” is not going to be the status quo ante.