Office vacancies have continued to rise in 2021, as the adverse effects of the pandemic continue to plague the office sector. Even as work returns to “normal” following lockdowns and, now, vaccines, it seems likely that the transformation of office work particularly, which many people have continued to do remotely, is here to stay. Thus, occupancy losses are more difficult to replace. Nevertheless, the decrease appears to have largely leveled out, as leasing activity rose above its pre-pandemic level for the first time in the second quarter of 2021, while sublet availability spiked to 70%, suggesting a kind of balancing out across the market. While the Sun Belt and secondary suburban markets outperformed metros during the worst months of the pandemic, major cities are beginning to rebound thanks to a return to high-rise towers in central business districts.

Q3 National Office Report

Leasing

New leasing volume finally climbed above its pre-pandemic levels for the first time in Q2 of 2021, driven by large deals signed by giant firms, such as Apple and Hulu. Interestingly, the tech industry is also leading the way in new work-from-home policies, which has resulted in cities like San Francisco and San Jose posting record sublet availability. Ultimately, with the pandemic playing out longer than expected, it’s impossible predict what the final impact will be and what the rebound will look like when it finally does happen.

Renting

As availability increased, rent prices continued to drop during the first half of 2021. Landlords are feeling additional pressure from sublet increases, which are generally offered at substantially discounted prices. While tech heavy cities like San Francisco, San Jose, Portland, and Austin have experienced the sharpest losses, many Sun Belt cities, including Memphis, Las Vegas, Raleigh, Charlotte, San Antonio, and all of Florida, have maintained positive growth rates.

Construction

As the pandemic curtailed demand, the supply of new deliveries slowed, which helped keep the vacancy rate reasonable. Moreover, without a clear end to the pandemic in sight, developers have been hesitant to start new projects, with new starts totaling just 15 million SF since the second quarter of 2020. Active construction peaked at the beginning of 2020 and has dropped 10% over the past 5 quarters.

Under Construction Properties

There’s currently 140 million SF under development, which represents less that 2% of existing stock in the US. Current markets with large projects underway include San Francisco, San Jose, Austin, and Seattle, where a lack of preleasing may prove to be problematic of sublets have risen exponentially in these same markets. In contrast, growth has been steady in the Sun Belt markets of Nashville, Charlotte, and Miami.

Sales

Sales transactions continue to follow last year’s subdued trend, reaching approximately 8,500 office building sales during the first half of 2021. With the exception of Boston, where recent growth has been driven by massive life-science industry deals, the coastal gateway cities like New York and San Francisco have been the hardest hit. Foreign direct investment has fallen dramatically since 2016 (for instance, 71% in New York), while private equity firms have been more willing to take on some investment risk as the market continues to evolve.

Economy

After appearing to recover to pre-pandemic levels by the second quarter of 2021, the resurgence of Covid-19 in the form of the Delta variant, put a serious damper on economic activity, and our new “return-to-normal” date is currently unknown. While consumer confidence had remained largely positive and was supported by the injection of about $6 trillion into the economy in the form of stimulus checks, the latest University of Michigan report showed consumer confidence sinking to its lowest in over a decade, most likely in response to the spread of the Delta variant and the newest onset of pandemic fatigue.

Although overall personal consumption was 7.1% higher in July 2021 than February 2020, that number has now fallen dramatically, and annual GDP predictions have shrunk from 7% to 5%, as the rapidly recovering labor market plateaued in August with just 235,000 jobs added for the whole month. Although the unemployment rate has reached a pandemic-era low at 5.2%, labor participation remains weak due to a variety of Covid-related factors. Moreover, there are approximately 5.3 million fewer jobs now than there were in February 2020. Finally, the strong consumer demand and historically low insurance rates earlier in the year have led to supply chain problems and the prices of homes increasing by 17.8% from July 2020 to July 2021.

This is a summarized version of an office market report that was originally created by CoStar. The full report can be found here .