Welcome Back…to the Grind

July 14, 2021

Uncertainty lingers in the office sector against a backdrop of extended office closures across the U.S. Average occupancy rates have dropped over the past year and net absorption further declined in the first quarter of 2021. The national average vacancy rate for the office sector rose to 16% in Q1 2021, up 100 basis points quarter-over-quarter and 370 basis points year-over-year.¹ The ongoing rate of deterioration in office fundamentals has been somewhat surprising given the rebound in the labor market as the economy has reopened. Although office rents have been sticky so far, questions remain about the longer-term demand for office space, with some property owners offering leasing concessions in primary markets hit hardest by vacancies.

The second half of the year should provide some clarity with the COVID-19 vaccine rollout in full swing and more and more employees expected to return to work. The long-term extent of remote working on office demand is the biggest outstanding question. Average days in the office has fallen from 4.6 days a week to 3.6 days a week.² Employers are re-evaluating office space needs, looking to balance a flexible work environment with the benefits of workplace collaboration and productivity. Rising new supply combined with more than a year of minimal leasing activity will also continue to put downward pressure on office rents and occupancies in the near term. From here, we may see office demand stabilize, setting the stage for an uptick in leasing activity, or we may realize we are facing a new normal. We will continue to look for and recommend to our clients real estate managers that we believe are best positioned to navigate this evolving dynamic.

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¹ Cushman & Wakefield, KPMG, The 2021 KPMG CEO Outlook Pulse Survey, Clarion Partners Investment Research, June 2021.
² TA Realty, Defining Themes of 2021