COVID-19’s full impact on the U.S. office market was evident in Q2 2020 with the largest quarterly drop in demand since 2001. The 21.5 million sq. ft. of negative net absorption was on par with the Q2 2009 trough level during the Great Recession and should similarly be the most severe quarterly decline during this downturn. It also was nearly half of Q3 2001’s record 41.2 million-sq.-ft. decline in absorption.
Various economic indicators now reveal that the economy is in the early stages of recovery. The experience of past recessions indicates that office leasing will resume after a lag that allows business momentum and confidence to return.
Leasing activity in Q2 fell by 44% year-over-year, increasing the national office vacancy rate by 70 basis points to 13%. Gross asking rents remained surprisingly stable, but landlord concessions increased. Average rents in downtown office markets declined in Q2 and vacancy rose more sharply than in suburban markets, consistent with prior downturns.
Figure 1: U.S. Office Net Absorption & Vacancy
Source: CBRE Econometric Advisors, Q2 2020.
The potential for a substantial increase in sublease space is a significant concern to many market observers, but additions have been uneven across markets. Markets with large concentrations of technology companies like San Francisco, Austin, Downtown Chicago and Boston have seen significant growth in sublease space.
Other markets like Manhattan and Washington, D.C. have seen only moderate additions of sublease space over the past three months. Occupiers there are taking a wait-and-see approach to the long-term impacts of COVID-19 on office usage and are concerned about how long any sublease offerings may remain on the market. In Dallas-Ft. Worth and Houston, less severe declines in employment may have limited additions of sublease space thus far. Regardless of varying local market dynamics, more sublease space is expected to favor tenants in the budding recovery.
Figure 2: Available Sublease Space in Top 10 U.S. Office Markets
Source: CBRE Research, Q2 2020.