US Office Vacancy Rate at Historic Low Despite Pandemic

The US office vacancy rate rose by 10 basis points in the first quarter of 2020, according to the Quarter One 2020 Office Market Outlook published by Colliers International this month, although the rate is still at a historic low despite the new coronavirus.

The US office vacancy rate currently sits at 11.5%, according to the report. Even with the increase, office vacancy rates are below the average for the past 21 consecutive quarters. Two-thirds of the US office markets have rates below the national average of 10.3%.  Seattle has the lowest vacancy rate of the major markets at 6.8%.

Stephen Newbold, national director of office research at Collier International in Washington DC, wrote in the report that the most lasting effect of COVID-19 on the US office markets “could come from firms reassessing their space needs and the flexibility of their lease agreements.”

“If it is proven that some business functions can be run successfully through remote working, tenants may decide not to house such operations in their office space once we reach the new normal,” Newbold wrote.

The report further speculates that companies may consider moving to a “more distributed labor strategy, rather than locating all functions in one central office.”

Further, co-working spaces have taken a hit from COVID-19. Those offices have been a key driver of leasing volume across most markets, according to the report. The report predicts that in the coming months there will be an increase in merger activity in the flexible workspace sector.

“The core co-working model is being impacted as clients, many of whom are on short-term agreements of as little as 30 to 90 days, cease to use such facilities,” Newbold wrote.

Leasing however began to take a hit during the first quarter of the year and specifically began to slow down in March as the pandemic began to take shape and stay at home orders were enforced.

“Additionally, several markets have seen a cessation in construction activity. Look for delivery dates to be moved back and a reassessment of speculative projects,” Newbold wrote in the report.

Cap rates and pricing have also held firm, according to the report. The average cap rates have stood at 6.5% which is 10 points down from this time last year. The report shows that investors are continuing to favor suburban assets. In the first quarter of 2020, investors put a total of $17.4 billion in suburban locations compared to 11.9 billion that was invested in central business districts.

Because of the greater investments in the suburbs, rent prices have slightly increased for the first quarter of 2020. The rent of the average Class A full-service office in the suburbs has risen by 0.9% to $31.85 per square foot. In CBD markets, the same kind of office rent has risen, on average, by 0.4% to $50.95 per square foot.