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.