So far, the tea leaves aren’t giving much guidance.
By some measures, the office sector seems to have improved some, according to a new report from Colliers. However, questions remain, and arise, about where the market might be headed
Last year closed out with some positive news, according to Colliers. For example, the Q1 2022 office vacancy rate stands at 14.8%, down from 14.9% in the fourth quarter of 2021. The amount of sublease space has fallen to 199.7 million square feet, from 208.8 million square feet in 2021’s second quarter. Net absorption was up nationally at the end of 2021 to nine million square feet, versus 3.2 million square feet in the third quarter of 2021. “This represents a significant turnaround from the cumulative 153 million square feet of negative absorption seen between Q2 2020 and Q2 2021,” said the report.
Which is all well and good. However, understanding business conditions also means considering the less pleasant information and reading around the happier data.
For example, construction activity continues to slow, with 120.5 million square feet in the process, “down 26% from this cycle’s peak of 164 million square feet, seen in Q3 2020.” Supply chain woes and labor shortages are making deadlines a challenge, which is one likely cause. However, to what degree has project viability become more questionable?
Certainly, of course, some markets are faring better than others with their pipelines. The New York metro area has by far the largest amount of ongoing construction, at 24.3 million square feet, followed by the San Francisco Bay Area with 10.7 million square feet, according to Colliers.
Another data point to consider: the number of people who are actually in the office. Kastle, which has customers in more than 2,600 US buildings in 138 cities, reports that the average weekly occupancy is still just 40%. Though there are regional differences, only the Austin metro is above 50%. .
With all the available office space, it could take nearly three years to absorb it. Office investors are likely to remain on the sidelines in primary markets. Many, though, are moving to secondary and tertiary markets, especially in the Sun Belt and west where there are large influxes of populations, creating CRE needs in many categories, including office.
The bottom line: We are still waiting to see how the office sector shakes out. As Colliers notes, vacancy rates will likely take until the latter half of 2022 to decline, but in selected markets. It will also take the first half of this year to determine whether net absorption will continue.
In the meantime, sublease space remains elevated, construction will continue to slow, and rents continue to hold up, “albeit with generous concessions.”
So far, in the office segment, the one dependable tenant remains uncertainty.