United States Office Outlook - Q1 2021
Improving sentiment will translate to significant activity in the second half of 2021.
The U.S. office market is at a critical crossroads, facing headwinds from residual supply and demand shocks and tailwinds from accelerated vaccine distribution and exceptional economic growth projections. Q1 2021 dynamics, however, were largely similar to those of the second half of 2020, characterized by extensive give-backs, rising vacancy and falling net effective rents. Tenants hold significant leverage and landlords are providing extensive rental abatement, termination rights and build-out allowances to maintain or attract tenancies.
- Leasing activity was once again flat at 26 million square feet in Q1 given uncertainty over re-entry timeframes, although in recent weeks sentiment has shifted markedly towards heightened interest that is likely to translate into substantial deal flow in the coming quarters once tenants are able to occupy space at scale and test out new working arrangements.
- Occupancy losses totaled a further 37.9 million square feet after a record 40.5 million square feet in Q4 2020, but the rate of negative net absorption is beginning to slow in a sign of optimism for stabilization and movement through the cycle. Combined with an additional 12.8 million square feet of completions this quarter, vacancy rose by a further 110 basis points to a record 18.2% and will remain elevated through 2021 and into 2022.
- The sublease market expanded to a new high of 151 million square feet, still disproportionately but not entirely due to give-backs in primary and tech-heavy metro areas. Of this space, 49.5 million square feet has yet to be vacated and could pose concerns for future vacancy increases, although this is likely inflated and much of this space could be taken back by tenants needing to adjust their utilization strategies.
An intense rebound in broader economic activity will further boost prospects for the office market, although many of these gains may occur in non-office-using sectors. Structural changes related to remote work programs and distributed labor pools will likely have a lasting impact on the office market, the extent to which may not be fully known until large-scale office re-entry commences.