U.S. Office Market Continues to Recover and Create Unique Opportunities for Tenants
by King White, on May 12, 2022 3:25:49 PM
Prior to the Covid-19 pandemic, the office market was landlord-controlled because demand was so high for office space. Today, however, in a waning-Covid-19 world, the office market is now tenant-controlled because of changing workplace strategies and supply of available space for rent or sublease, putting landlords at a disadvantage in this suddenly competitive market for tenants.
Fortunately, the U.S. office market has shown signs of recovery in 2021-2022. For example:
• Absorption: After showing positive net occupancy growth in Q4 2021 for the first time since the onset of the pandemic, net absorption has logged three positive consecutive quarters of growth, which will likely continue as more workers return to the office.
• Vacancy Rates: Occupancy rates stayed steady in Q1 2022, with the office space market vacancy rate relatively steady at about 12 percent.
• Leasing: Leasing activity has increased about 5.4%, again driven by the expectations of more employees in the office. Rent growth over the last 12 months has been about 1%.
• Sublease Space: Even though subleasing activity grew in 2022, there is still a considerable amount of sublease space available (about 208 million square feet). Nationally, about half of all sublease space is occupied.
• New construction: About 140 million square feet of new office space is under construction, with about two-thirds of it already leased. Fortunately, new construction is at a lower volume, which should still allow more absorption of existing space.
Work from Home (WFH)
WFH is the dominant issue faced by companies as they consider a return to pre-pandemic office settings. As more companies call their employees back to work, demand for office space should improve in 2022.
A number of companies are designing hybrid work programs to meet employee preferences for a combination of both in-office and at-home schedules. This requires careful planning for selecting the right amount of office space, as well as the amenities, flexible designs, and safety precautions to meet employee needs and expectations.
It is difficult to know how many workers will ultimately return to their former offices. Predictions vary, but most experts expect that about 55% to 65% will return. Most major American cities are at about a 40% level. One of the top states is Texas, in the 50% range—in fact, at 58.3%, has the highest percentage in the nation. The higher rates in Texas could be a result of the state’s aggressive push to be open for business, as well as its lenient policies regarding Covid-19 and mask-wearing.
2022 will be an interesting year for the office space market. Major impactors could be geopolitical conflicts, supply chain disruptions, wage growth, and inflation. Work-from-home employees will definitely reduce the amount of office space leased.
Overall, with an increasing number of firms announcing return to office plans, demand is expected to improve further throughout 2022. Still, it will be difficult to offset the level of new construction, which will prevent any significant decline in vacancy.
Utilization is still just a fraction of pre-pandemic levels, although it has continued to improve as the health situation stabilizes. And while many firms are returning to the office, most are committed to flexibility and hybrid workplace schedules. It will take some time for office-using tenants to assess space needs in this new environment and even longer for the full impact on office space demand to be realized.
SSG believes it may be at least 2025 or 2026 before office real estate conditions are stabilized due to the impact of Covid-19. Some landlords will likely default on upcoming expiring loans as tenants fail to renew their leases, combined with much higher interest rates to finance the properties.
2022 is the perfect time to leverage the office market.
If you are looking for office space, right now is the perfect time to take advantage of conditions in a tenant-controlled market. Landlords are offering more concessions such as free rent and additional tenant improvement allowances. For companies looking to renew a lease, renegotiate an existing lease, or expand into a new location, working with an experienced site selection and tenant representation consultant can help to evaluate all options and maximize your leverage during negotiations.