Office Landlords Hold Firm On Asking Rents As Demand Increases

Demand for office space is predicted to rebound for the remainder of this year, causing landlords to stand firm on asking rents as new stock comes online, pushing rates upward.

A new report from Transwestern shows that tour activity is up across most major markets, though “notable deal volume” has not yet materialized. The vacancy rate remains at 12.6% nationally, with net absorption at 22.9 million square feet in Q2.  But annual asking rents are up 1.9% year-over-year, signaling what many believe will be a return to normal sooner than later.

“We expect pent-up demand to emerge starting in Q3 with greater traction in Q4, as tenants come off the sidelines,” the report notes. “With the market in tenants’ favor, select companies will take advantage of favorable financial terms… The office is not dead but will evolve to meet new challenges and work patterns.”

Job growth remains a positive driver for the sector, as 1.6 million jobs were added during the quarter, including 208,100 office-using positions. Most of the jobs added during Q2 were hospitality and leisure focused, but 77% of office-using jobs lost since March 2020 have been recovered.

Three markets were office standouts during the quarter: Raleigh-Durham, Nashville, and Tampa, all of which posted positive net absorption. And three-quarters of all markets surveyed by Transwestern showed net absorption above average quarterly figures over the past year.

Miami, Los Angeles, Westchester, Charlotte, Austin, and Nashville all showed moderate asking rent growth since the beginning of the pandemic, according to the report.

Just this week, Boston Properties CEO Owen Thomas told CNBC that he remains bullish on the office sector, and that Labor Day will be an important “inflection point” going forward. And recent data from the Kastle Back to Work Barometer shows workers are steadily (though slowly) returning to the office across its universe of key holders: of the 10 cities measured on the Back to Work Barometer, eight saw slight increases in building occupancy rates during the week of July 21, with the 10-city average rising 0.4 percentage points to 34.8%. Austin leads the nation with 53.5% open, followed by Houston and Dallas. And across professional sectors, law firms reached 58% occupancy rates outpacing the broader commercial real estate industry.