The Market Favors High-Value Office Assets

Nationally, the office market appears to be stagnant; however unique geographic trends are emerging. Data from JLL shows a concerning national trends in the office market, from a decline in occupancy to an increase in sublease space. However, recent data from REIS Moody’s Analytics has found that individual markets reveal emerging trends in market activity.

According to JLL, the dramatic decline in office activity during the second quarter sparked third quarter volatility. Many firms are choosing to stay in place and wait out the uncertainty, and firms with lease renewals are using three-to-five year lease extension options. As a result, 55% of national leasing came from renewals in the third quarter. An increase in givebacks have also led to a 28.9 million-square-foot decrease in occupancy. This is the largest single-drop in a quarter on record, and it brought the vacancy rate to 16%. Unsurprisingly, this has also led to an  excess of sublease space. The market is now larger than it was during the dot-com era, and JLL expects the market to reach 150 million square feet.

While overall the office market fundamentals are grim, market-specific trends reveal varying activity. The report from REIS Moody’s Analytics shows that some markets are skewing toward high-asset value. In Milwaukee, Jacksonville, Tampa, Central New Jersey and San Francisco, properties with the lowest cap rates are trading hands, showing that the highest value properties are trading. The report suggests this is due to increased investor uncertainty.

On the other hand, San Jose, Orlando, Seattle, Atlanta and Nashville are seeing activity that is similar to normal market activity. Still, other markets—namely Suburban Maryland, Las Vegas, Miami, Baltimore and San Diego—have seen office activity with assets where cap rates trend higher. The REIS data says that this trend is unclear, but it could be a sign that there is a decline of investor confidence for these metros specifically.

In terms of absorption, the JLL report shows stronger absorption rates in secondary metros than in major metros. New York, for example, has the lowest absorption in the nation, along with San Francisco, Boston, Washington DC, Dallas and Los Angeles. Only six metros measured by the firm reported positive absorption during the quarter, including Atlanta, Silicon Valley, Salt Lake City, Phoenix, Cleveland and Baltimore.

The office market has been severely impacted by both job loss as well as the work-from-home mandates. A recent report from Cushman & Wakefield shows that have been 1.7 million jobs lost in 2020, and as a result, office demand will decline by 30% more during the pandemic than it did in 2008.