Office Net Absorption Went Negative in Q2 While Rents Inched Higher
Landlords typically hesitate to lower rents during the early days of an economic downturn.
Office real estate net absorption fell in the first quarter and then sank in the second as COVID-19 strongly influenced a host of key office leasing metrics, according to Cushman & Wakefield’s latest quarterly report on the office sector.
After hitting net absorption of nearly 16 million square feet nationwide in the fourth quarter of 2019, the total fell to 5.2 million in Q1 2020 and then plunged to negative 22.8 million, the report says.
“A total of 65 office markets logged negative absorption, the largest number of contracting markets we have ever recorded,” Cushman & Wakefield said in the report.
It was also “the largest quarterly decline in net demand for office space since the second quarter of 2009 during the Great Recession,” the report said.
Other metrics also saw impacts.
The supply of completed new construction dropped from 13 million square feet in the first quarter to 9.9 million in the second. The pipeline of new projects still under construction stands at 134.5 million square feet, above the historical average of 115 million square feet.
“As construction projects interrupted by COVID-19 have recommenced and head towards the finish line, the pipeline should decrease throughout the second half of 2020,” the report said.
The vacancy rate for offices leapt in the second quarter, experiencing “the largest one-quarter rise in the national vacancy rate since Q3 2009.” The rate was 13.2 in Q1 and 13.7 in Q2. And it’s only going higher.
“We expect the national vacancy rate to rise over the coming quarters leading to downward pressure on effective rents,” the report said.
Despite the severe recession and other economic headwinds, office rents increased during Q2. That’s to be expected, the report said, as landlords typically hesitate to lower rents during the early days of an economic downturn.
“During the Great Recession, for example, we observed that vacancy bottomed in Q4 2008 but the national average asking rent continued to increase for another year,” the report said.
Asking rents were up 1.5% in Q2 from the previous quarter, according to the report, hitting to $34.03 per square foot.
Besides giving national figures, the Cushman & Wakefield also includes numbers for individual markets. The office market in Orange County, California, specifically, fared relatively well, according to a new report from JLL.
Moving forward, office space is the subject of much discussion as the COVID-19 pandemic and government shutdowns forced workers out of offices and into remote setups. Companies are rethinking how to use their physical spaces, whether they need as much and where to locate it.