COVID triggers disruption in Q2 office leasing across U.S. markets

CHICAGO, July 16, 2020 – The U.S. office market witnessed widespread disruption during the second quarter of 2020 as the full onset of COVID took hold and government mandates effectively ceased in-person tour activity, causing leasing volume to drop significantly. As a result, absorption trended into correction territory with 14 million square feet of net occupancy losses and sublease space grew, impacting pricing and reducing net effective rents.

Heading into the second half of 2020, all eyes will be on tenants’ response to office re-entry and the ability of states to withstand and contain a potential second wave of COVID. Demographic shifts – namely inbound migration to low-cost and pro-business jurisdictions – will likely lead to a faster recovery for Sun Belt markets than coastal U.S. gateway cities, whose dense urban environments and reliance upon public transportation pose additional challenges.

“Obviously there were, in many ways unprecedented, external forces that impacted the office sector during the quarter with shelter-in-place ordinances chasing workers from the office to their homes,” said John Gates, Americas CEO, Markets, JLL. “There has been tremendous short-term pain while the economy begins to recover from the pressures of the pandemic, which could continue to creep into the back-half of the year. The good news is, that the underlying fundamentals and demand for office space were strong prior to the pandemic – and we believe those will carry through as the country emerges. While working from home has become the norm currently, all surveying of workers points to their desire to get back to the office when it is safe to do so.” 

From an industry standpoint, leasing for finance and tech essentially tied on aggregate, with larger deals mainly stemming from government, health and health insurance. Despite driving 38 percent of all occupancy growth in 2018 and 2019, the coworking sector more or less halted leasing and several flexible space operators engaged landlords to restructure existing deals or reduce square footage. Still, JLL research forecasts that 30 percent of the office market will be consumed flexibly by 2030.

Development activity remained largely unchanged as state and local mandates froze construction progress and extended timeframes into the third quarter or even 2021 for anticipated 2020 deliveries. As construction lending tightens and future demand remains uncertain, new groundbreakings are expected to curtail.