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US office market statistics, trends & outlook

Although the Delta variant delayed office re-entry, real estate and economic indicators are moving in the right direction

October 21, 2021
Contributors:
  • Phil Ryan

Originally expected to be a time of large-scale office re-entry, the arrival of the Delta variant led to a pause in the office market’s recovery during the third quarter as numerous major tenants opted to extend their timeframes for occupancy either to later in 2021 or out to 2022. Even with this bump in the road, macroeconomic indicators remained optimistic, albeit slightly downgraded compared to forecasts from earlier in the year. The office market showed signs of promise and the beginnings of tenants firming their longer-term utilization plans. Leasing activity rose once again in Q3, most notably in fast-growing secondary markets, while sublease space contracted modestly and occupancy losses slowed once again. With a large construction pipeline through the end of 2022, however, conditions will remain tenant-favorable for the foreseeable future, while flight to quality and an accelerated rate of relocations to newer supply will lead to even greater divergence in performance across office assets. Even with a more gradual re-entry process and potentially more balanced hybrid plans than initially expected, the crucial role that physical offices play in fostering corporate culture, productivity and innovation will underline the longer-term need for space that meets evolving tenant and employee preferences.

  • Gross leasing volumes rose by a further 7.8% in Q3, approaching 40 m.s.f. for the first time since the onset of the pandemic. As a result, total transactions are up 1.7% compared to this time in 2020, but are still 43.8% below 2019 levels. Lower-cost secondary markets in the Sun Belt and the West dominated this quarter, recording 18.7% growth in leasing compared to a 7.5% rise in gateway geographies given looser business regulations as well as individual and corporate movement towards affordability.
  • Net absorption was once again negative in Q3 as lingering blocks were vacated either due to relocation, contraction or movement to fully remote work. However, Q3 was the third consecutive quarter of slowing occupancy loss: the -7.3 m.s.f. of net absorption was the first quarterly figure below -10 m.s.f. during the current downturn, a further sign of impending stabilization. In part due to inbound migration as well as greater levels of re-occupancy, a number of Sun Belt and innovation-heavy geographies reported positive net absorption in Q3.
  • After rising by 64.3 m.s.f. from Q1 2020 to Q2 2021, sublease availability contracted nationally by 2.5 m.s.f. due to a combination of slower listings and a faster rate of withdrawal of blocks on the market. By mid-September, withdrawals had been occurring 1.9x faster than new blocks were being listed for sublease. Withdrawals are largely coming from take-backs of space rather than backfilling, with 75.5% of sublease availabilities pulled since late March being taken back by sublessors rather than being taken on by a subtenant.
Q3 2021 U.S. Office highlights

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