Nationally, employment in office-using industries decreased by 4.8% in September, which is contributing to the decline in asking lease rates and rising vacancies in the office market.
The national average full-service lease rate dropped $0.25 in September from the previous month to $38.07 — a 0.5% decrease from the same period last year, according to a report from Commercial Edge, a new commercial real estate property research platform designed by Yardi Systems Inc. At the same time, the national vacancy rate increased 50 basis points month-over-month to 13.6%.
A report from CBRE Research found that total leasing activity in the US office market was down by 39% year-over-year in the third quarters, and the renewals share of all leases increased to 45%. However, third-quarter leasing activity was higher than in the second quarter.
“The office market across the US is in fits and starts now,” said Lexi Russell, director of research and analysis for the Mountain-Northwest Division of CBRE. “What happened in March was even though not all markets shut down at the same time, they shut down at close to a similar time.”
It’s Not All Bad News
There are bright spots in the office sector despite the pandemic. In San Francisco, for example, several notable tenants moved into new space, said Doug Ressler, manager of business intelligence for Yardi. Companies moving into new space during the third quarter included BridgeBio, iSchemaView, Notable Labs, and Tempus Labs.
“Resiliency and optimism surrounding the tech sector has minimized occupancy losses through the year,” Ressler said.
The Bay Area, which includes Silicon Valley and the East Bay, had strong asking lease rate growth, with rates jumping 10.2% year-over-year to $53.10, according to the Commercial Edge report.
“Landlords in Silicon Valley have yet to relent on asking rates,” Ressler said. “Spaces which command higher rents have come to market, causing a rise in rates over the short term.”
Office-using employment in Texas has fallen less than in most other markets, likely because of looser pandemic-related restrictions. Of the top 35 metro areas, only two showed positive year-over-year growth — Dallas at 0.4% and Austin at 3.3% — according to Commercial Edge.
Dallas saw its asking lease rates drop 2.2% to $27.68 a square foot while Austin’s increased 2.8% to $42.36 per square foot.
“The Texas office activity is highly correlated with the Texas governor’s re-opening policies,” Ressler said. “In late June and July, Texas paused and reduced capacity for many businesses across the state. Recent announcements in September to reopen offices indicate a positive outlook on the Texas office environment moving into year-end 2020.”
Office Space Construction Is Still Happening
Construction of office projects that were underway before the pandemic hit has continued while others that were still in the planning stages may have been put on hold. Nationally, 49 million square feet of office space was delivered in the first three quarters of the year, with the majority of the new supply rated as Class A or A+, according to Commercial Edge.
“If they were under construction, they remained under construction,” CBRE’s Russell said. “Recessions tend to bring a flight to quality, so that will bring new construction. We are not overbuilt, and there is still demand for new buildings.”
Still, only 24 of the top 75 markets analyzed have more square footage under construction than at the start of 2020.
Chicago is one of the few metro areas that has added to the amount of office space under construction this year, largely because of the1.2 million-square-foot Salesforce Tower that had been in the planning stages since 2017. The project is expected to be completed in 2023. Another 1.6 million square feet are being added at Bell Works Chicagoland, a former AT&T corporate campus being repurposed as a “metroburb,” a concept that brings the live-work-play lifestyle to the suburbs.
The office market will begin its recovery when it's safe to have more than six people in a room together, Russell said. She noted a CBRE survey of office-based companies that found while employees want greater flexibility, they want to return to the office for the camaraderie and mentorship opportunities being around other people affords.
“We’re social creatures craving in-person interactions,” Russell said. “Professional connections happen in the office or at post-office events.”
About the Author
Margaret is an award-winning journalist who spent nearly 25 years in the newspaper industry. She has covered a variety of business topics, including residential and commercial real estate, technology, telecommunications, and cannabis.