Although total leasing volume remains below pre-pandemic norms, there are signs that the office real estate market in the US is starting to recover. In Q3 2021, net absorption turned positive for the first since the beginning of the pandemic, and the amount of sublet space fell quarter over quarter last year. While rents remain stagnant and will probably do so for a while, especially as more companies explore flexible and remote work options, office sales did rebound last year, with total deal volume roughly matching the quarterly average from 2015 to 2019. Vacancy rates may not improve in the near future, but trophy assets leased to credit tenants continue to sell for considerable prices.

Q2 Office Market Report

Leasing

With sublet availability remaining near an all-time high of 200 million SF, office leasing activity continues to struggle. Since many companies are continuing to let their employees work remotely or maintain flexible schedules to lessen the building occupancy for social distancing purposes, leasing volume remains below average. Nevertheless, trailing 12-month absorption, while negative across most of the country, is positive in smaller and mid-sized Sun Belt cities like Austin, Miami, and Orlando, which offer less expensive options that the major East and West coast cities.

Renting

On a year-over-year basis, rent growth remains flat. It’s nearly impossible for landlords to increase rents when vacancy rates and sublet activity are so high. Indeed, in order to appeal to new renters, landlords have started offering aggressive free rent and tenant improvement packages rather than lowering rent. Given the major changes wrought by the pandemic, it’s too soon to tell when the office rental market will be able to rebound to pre-pandemic levels.

Construction

As vacancy rates remain high in the office market, new construction has slowed from pre-pandemic levels. Of the new construction that’s been completed since the start of 2020, about 25% remains unleased, while 40% of what is currently under development is also unleased. Given the increasing availability of office space, less financing is available for speculative projects, which slow the pace of deliveries in the near future.

Under Construction Properties

Tech centers like San Jose, Austin, and Seattle have the largest supply underway on a percentage basis, but Sun Belt cities where net absorption has remained above average are still building ahead of the curve. These include Nashville, Miami, and Charlotte. Other construction-heavy cities like New York, DC, and San Francisco still have large projects underway, but they have slowed considerably in response to the pandemic.

Sales

Nationwide office sales volume finally started to increase again in Q3 2021, reaching pre-pandemic levels, but cap rates and average pricing have generally held steady. Moreover, investors still seem willing to shell out top dollar for well-located properties with credit tenants. Locations with weaker markets are, naturally, experiencing more challenges as they attempt to recover from pandemic effects.

Economy

The US economy continues to reel from the ongoing effects of the coronavirus pandemic, as new variants seem to arrive in waves just as economic recovery starts to look upward. Nevertheless, with unemployment at a pandemic-era low of 4.2% and competition driving wages up, not everything is gloom and doom.

Consumer spending appears to be matching the positivity people might be feeling about the labor market. For instance, while spending on durable goods has slowed, it was still 34% than prior to the pandemic. However, spending on services remains low, as people continue to question the safety of traveling, eating in restaurants, etc.

As consumer spending continues to outpace the personal savings rate, inflationary increases are also on the rise. Inflation rose for the 11th month in a row last November (by 5.7%) and is currently at its highest rate since 1982. Recognizing that this is no longer a “transitory” situation, the Federal Reserve plans to end asset purchases by March 2022 and increase rates shortly thereafter. This may also have an ameliorative effect on the housing market, which saw explosive pricing increases during the pandemic (more than 13.9% over the year last November) in response to increasing demand and limited inventory.

This is a summarized version of an office market report that was originally created by CoStar. The full report can be https://www.compass-commercial.com/office-usa-market-report/.