by Brianna Crandall — August 31, 2020 — Global commercial real estate services and investment firm CBRE Group released two reports in recent weeks concerning the effects of the coronavirus pandemic and shutdowns during the second quarter (Q2) of 2020. The first covered office space demand, vacancy and how much is offered for sublease, and the second explored leasing concessions offered by landlords.
Office space demand, vacancy, for sublease
According to the first report, COVID-19’s full impact on the US office market was evident in Q2 2020 with the largest quarterly drop in demand since 2001. Leasing activity in Q2 fell by 44% year-over-year, increasing the national office vacancy rate by 70 basis points to 13%. Gross asking rents remained “surprisingly” stable. Average rents in downtown office markets declined, and vacancy rose more sharply than in suburban markets, consistent with prior downturns.
The amount of office space offered for sublease in the 10 largest US office markets has increased by 12 percent since the COVID-19 pandemic forced a shutdown of local economies in March, according to the report.
Office space offered for sublease increased by 6.1 million sq. ft. in those 10 markets since March to total nearly 59 million sq. ft. in June, according to CBRE’s analysis. Some of the biggest increases have come in markets with significant technology employment such as San Francisco, Denver and Boston. Tech companies tend to keep extra space to accommodate quick expansion but then seek to shed it in downturns.
Markets with smaller increases in office space offered for sublease include several with diversified employment bases such as Manhattan; Washington, DC; Dallas-Fort Worth and even Houston, which has expanded its job base in health care and tech to supplement its base of energy employment.
Ian Anderson, CBRE’s Americas head of Office Research, remarked:
Space offered for sublease is a highly fluid and difficult-to-track metric, since companies can put space on the market or withdraw it on a daily basis. But the general increase in space offered for sublease amid the pandemic is to be expected. We believe that the second quarter was the low point for the market with office leasing activity down by more than 40 percent from a year earlier — and that we’ll begin to see a gradual recovery.
Companies can offer some or all of their office space for sublease by a third party if the terms of their lease allow it. In most cases, the lessor still would be owed the full amount stipulated by the master lease regardless of who occupies the space.
10 Largest US Office Markets: Space Offered for Sublease In June
|Market||Sq. Ft. Offered for Sublease||% change March to June||Market||Sq. Ft. Offered for Sublease||% Change March to June|
|Wash DC||6.4M||4%||Los Angeles||4.8M||28%|
The full U.S. MarketFlash: COVID-19 Causes Sharp Drop in Q2 Office Demand as Expected report is available to download from the CBRE website.
Office leasing concessions by landlords
Amid reduced leasing activity due to the pandemic, base rents for office space in the 15 largest US markets generally remained stable. Instead, property owners provided more favorable concessions to tenants, causing net effective rents to fall, according to the second report. Office building owners provided more free rent and larger tenant-improvement allowances in Q2 to secure new office leases and renewals amid the general slowdown.
The impact of these concessions is evident in the second quarter’s 6.6 percent, year-over-year decline in net effective office rent in the 15 largest US markets, according to CBRE. Net effective rent takes into account financial concessions (periods of time that a tenant does not have to pay rent, contributions toward the construction of a tenant’s space, etc.) that will be subtracted from a lease’s contracted base rent. In comparison, base rent — before concessions — declined by only 1.1 percent in the second quarter from a year earlier.
Meanwhile, the average length of free-rent periods provided to induce a new lease signing or renewal in Q2 amounted to 10 months. That’s a 13.7 percent increase from the first-quarter average, points out CBRE.
Another measure of concessions — tenant-improvement allowances — increased by 5.1 percent in the second quarter from the first to $75.57 per square foot. Landlords provide tenants these allowances to build out their new space to their individual needs. That percentage gain might have been greater if not for declines in construction pricing, notes CBRE.
Whitley Collins, CBRE global president of Occupier Advisory and Transaction Services, stated:
Overall, US office-leasing activity declined by roughly 43 percent in the second quarter from a year earlier, so it is to be expected that building owners would need to occasionally use some sweeteners to nail down a new lease in this tough environment. This means that office tenants can find some advantageous terms in many markets, at least until the US economic recovery gains more momentum.
The full U.S. MarketFlash: Office Lease Concessions Rising In Tenant-Favorable Market report is available from the CBRE website.