Office market primed for rebound as dynamics begin to stabilize
After more than a year of uncertainty and unprecedented challenges, the U.S. office market is stabilizing and slowly capitalizing on the macroeconomic recovery. Falling unemployment, rising consumer spending, greater mobility and improved vaccination rates are all setting the stage for pent-up demand to be realized, particularly in gateway markets disproportionately hit by the challenges of social distancing, limited travel and density. Although subdued and still challenged by delayed office re-entry and uncertain long-term space planning, office market indicators provided glimpses of the beginnings of a resurgence in Q2 2021: leasing improved meaningfully for the first time since the onset of the pandemic, while occupancy losses slowed and many tenants elected to withdraw space previously placed on the sublease market. Many of the trends that are only just emerging in Q2 are expected to accelerate in the second half of 2021, but with wide variance in performance based on asset quality and location.
- Gross leasing activity rose by 28.7% over the quarter to 34.7 million square feet in Q2, the first time that it has surpassed 30 million square feet since on the onset of COVID-19. Despite this increase, this is still 41.6% below the pre-pandemic quarterly average, underscoring the road to recovery for office leasing fundamentals.
- Net absorption remained negative in Q2. Conditions are challenged by elevated levels of sublease space and the generally lagging nature of the office market during economic downturns. However, the 20.7 million square feet of occupancy losses recorded during Q2 represented a second consecutive slowdown in negative net absorption, demonstrating that an inflection point has arisen.
- The sublease market is showing nascent signs of stabilization: despite rising to a record 158.1 million square feet, the rate of expansion of the sublease market slowed for the third consecutive quarter to just 4.5%, nearly 80% slower than at the peak of the pandemic in mid-2020. The gap between sublease space being advertised and the amount of space actually being vacated has also stabilized at 48 million square feet, staying near this figure for three quarters.
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