Office Market Faces Months of Further Uncertainty From Coronavirus

The U.S. office market is awash in uncertainty entering 2021, as tenants mull their strategies in the pandemic and monitor the progress of Americans in getting vaccinated, according to a CoStar analysis.

“Though we received positive news regarding vaccines during the fourth quarter, it will take several months for widespread distribution and acceptance by the public,” Michael Roessle, director of U.S. office analytics for CoStar, said in his analysis of the past year and scenarios for the coming months. “As such, many firms have delayed a return to the office until mid-2021 or later and were in no hurry to sign leases before year-end.”

The bottom line is “the U.S. office sector will likely see a continuation of late-2020 trends in the near term,” according to Roessle.

The COVID-19 outbreak on many fronts, including leasing and investment, wreaked more havoc on the office market than the Great Recession and its immediate aftermath, Roessle said. For example, leasing velocity totaled 270 million square feet for the year, a 40% drop from 2019 and nearly 15% lower than the bottom of the financial crisis in 2009, according to Roessle. During that time roughly a decade ago, some companies locked in early renewals at low rents or moved to higher-quality space.

“This time, tenants largely opted to hit pause unless faced with an immediate lease expiration, and then many opted to kick the can down the road with a short-term renewal,” Roessle said. “Many tenants are still evaluating the cost savings versus culture-erosion dynamic brought about by the largely successful work-from-home experiment. Few have been willing to spend capital on major redesigns of their office space, as there still isn’t full clarity as to whether the layouts and designs necessary today will be necessary and still functional in 12, 24 or 36 months.”

While there were a number of large office leases signed last year, “demand recorded a second straight quarter of losses surpassing 30 million square feet in the fourth quarter, pushing the annual loss past 75 million square feet,” according to Roessle.

“This met with about 45 million square feet of deliveries to push the vacancy rate past 11% for the first time since 2015, when vacancy was trending steadily downward following the Great Recession,” he said.