At the national level, the vacancy rate rose further to 16.4% in the first quarter of 2021, compared to 13% a year ago. However, the impact of the pandemic varied from region to region. There has been a huge spike in vacancies in the gateway and tech-heavy cities due to subleases, while in smaller secondary / tertiary markets, vacancy rates have increased relatively marginally in line with recent commercial market trends and markets from NAR's Outlook report.
Primary cities have seen a huge increase in office vacancy rates, but a slight increase in secondary / tertiary cities
In San Francisco, the vacancy rate (available directly and via sublet) increased by a whopping 12.7 percentage points from the first quarter of 2021 compared to the previous year (6% to 18.7%), as 9.7 million square feet of office space was vacant. according to market data from Cushman and Wakefield. In Seattle, the vacancy rate rose by 9.2 percentage points (8% to 17.2%) as 4.3 million square meters of office space was no longer occupied. New York-Midtown South has shed the most office space at 10.7 million square feet, causing the vacancy rate to increase by 8.8 percentage points (8.2% to 17%). Cities with a relatively large tech workforce such as Austin, Nashville, Rochester, Salt Lake City, and Puget Sound (including Seattle) also saw vacancy rates rise.
On the other hand, vacancy rates in most secondary or tertiary cities have risen only slightly. One reason could be attributed to the paycheck protection program, which helped small businesses stay in business and allowed small business owners to continue paying rent and entering into agreements with landlords. With the pandemic affecting the entire economy, landlords would also have had difficulty finding new office tenants. According to the US Census Business Pulse Survey, less than 2% of small businesses have closed permanently, even if half are operating below normal capacity.
There are also location-specific factors that are responsible for the moderate increase in vacancy rates. In Savannah, vacancy rates actually fell, with office leasing activities benefiting from Savannah's strong commercial real estate market as port operations grew and sales and warehousing picked up. The vacancy rate in industry was only 3.4%. Fort Myers / Naples benefits from the expansion of medical practices in the region. In Tucson, leases continued to be signed in the Foothills submarket. Tucson benefits from relatively low office rents compared to Phoenix.
Gateway cities suffered a sharp drop in occupancy, while areas with higher occupancy were secondary / tertiary markets
Only in the secondary / tertiary markets did office use increase in the first quarter of 2021 compared to the previous year. These are Hampton Roads, Boise, Milwaukee, Buffalo, Tucson, Maryland, Fredericksburg, and Binghamton. The demand for office space in Hampton Roads is likely linked to the strong growth in industrial / logistics development in Hampton Roads (Portside Logistics by Brookwood Development, Commerce Park in Harbor View, Coastal Logistics Center) .1 Boise is not surprising given Idaho was that State with the highest percentage population growth in the years 2010 to 2020, based on the recently published ten-year survey 2020. As already mentioned, Fort Myers / Naples is benefiting from the expansion of medical practices in the region. In Tucson, leases continued to be signed in the Foothills submarket, with Tucson benefiting from relatively low office rents compared to Phoenix. There has been little downsizing in Milwaukee. 2
Rising vacancy rates due to subleases
Nationwide, the vacancy rate rose further in the first quarter of 2021 to 16.4% compared to 13% a year ago. Vacancy rates continue to rise, with 21% of the workforce still working from home as of March 2021 (6% before the pandemic) and even higher at 58% for computer and math workers.3 Vacancy rates have risen as the occupiers 138.4 million square meters of office space have been reduced
Vacancies available in the context of subleases make up a large part of the total vacancy rate in large cities with strong technology and financial sectors. Direct tenants still rent the office space, but since the employees work from home, the unused office space is sublet. The available office space from flexible operators like WeWork is also part of this sublet space, and technicians and startups have been the largest users of flexible office space.
Austin, San Francisco, New York-Midtown, Seattle, and Puget Sound are areas where the number of vacant space available through sub-leases has increased dramatically. In Austin and San Francisco, vacancy available through subleases rose from just 2% a year ago to 8% of office space.
Office market for secondary / tertiary sectors See enormous increase in asking rents
In areas with high vacancy rates, asking rents have fallen dramatically since the first quarter of 2021 compared to the previous year, for example in San Francisco (-12%) and New York Midtown South (-9%). In cities with low vacancy rates, however, asking rents have risen sharply by up to 15%, for example in Fort Myers / Naples (+ 23%), Roanoke (+ 20%) and Colorado Springs (+ 17%). .
Surprisingly, asking rents also continued to rise in San Jose (15%), Nashville (9%) and Austin (8%), although vacancy rates in these areas rose sharply. According to market data from Cushman and Wakefield, asking rents rose 5% year over year from the first quarter of 2021. Although asking rents have not fallen, most landlords have granted tenant concessions. This is because the pandemic is a temporary shock to the office market, so landlords are not cutting asking rents for leases beyond the short-term effects of the pandemic. Instead, they grant concessions to lower current rents. Fifty-five percent of NAR commercial members who responded to the latest quarterly commercial survey said they are seeing more tenant concessions compared to pre-pandemic times.
Cities in countries with strong population growth are likely to see continued demand for office space
The secondary markets in populous states like Idaho (Boise), Utah (Salt Lake), Texas (Dallas, Austin, Houston, San Antonio), Florida (Fort Myers), and Virginia (Hampton Roads) are likely to continue to demand office space see. At the national level, the recovery in demand for office space in major cities depends on workers returning to their offices. As mentioned, a large proportion of the vacancies are filled through sub-leasing, with just over half of computer / mathematicians still working from home. Not all are likely to return to the office, and assuming 5% of the additional jobs that will be created are working from home, vacancy rates are likely to rise further to around 18% in 2022.
1Cushman and Wakefield, https://www.cushmanwakefield.com/de/united-states/insights/us-marketbeats/hampton-roads-marketbeats
3 Source: American Community Survey 2019 and supplementary BLS COVID-19 survey
4How big is 138.4 million square meters? A soccer field is approximately 57,600 square feet, so the net negative absorption is equal to 2,403 soccer fields, or 48 soccer fields per state.