United States Office Outlook - Q4 2020
An abrupt stall in market activity and record give-backs in 2020 will give way to the start of an incremental recovery in 2021
Uncertainty pervaded the office market at the end of an unprecedented year as tenants and owners alike navigate rapidly changing conditions and a continued pause in activity across markets, industries and asset classes. The fourth quarter marked a third consecutive quarter of limited leasing, widespread give-backs, accelerating occupancy loss and rising vacancy, but with newfound but cautious optimism as vaccine rollouts expand and users can begin to make more targeted expectations of when and ultimately how they will move forward with their real estate needs.
- Gross leasing in Q4 was once again heavily subdued compared to historic norms, reaching just 25.2 million square feet, bringing 2020 volumes to 125.6 million square feet. Compared to 2019, this represents a 47.3% drop-off in transaction activity as long-term planning remains difficult apart from select highly capitalized users.
- The U.S. office market recorded the first instance of more than 40 million square feet of occupancy losses in a given quarter in Q4, with a further 40.6 million square feet of negative net absorption bringing 2020 total occupancy declines to an unprecedented 84 million square feet. As a result, total vacancy rose to 17.1% at year-end.
- The most prominent effect of COVID-19 on the office market remains the rapid expansion of the sublease market. In Q4, an additional 18.4 million square feet of sublease space hit the market, bringing the segment to more than 141.5 million square feet. Over the course of the pandemic, the sublease market has expanded by nearly 47.6 million square feet, or 50.7%.
Tenants considering their options will find an environment characterized by exceedingly friendly concessions, an array of options across asset classes and price ranges and limited competition for both quality and commodity space. Owners and investors placing health, safety and wellbeing top of mind will be rewarded with greater returns, while lower workplace density and reconfigurations to handle greater logistical flexibility will help to keep overall office utilization and occupancy more stable than previously expected.