10 Office Markets Facing Deep Challenges

The top 10 office markets in US are continuing to struggle amid the ongoing pandemic. In the third quarter, office performance deteriorated compared to the second quarter, illustrating the depths of this downturn. Negative absorption, flat or decreasing rents and rising vacancy marked the top office markets in the US, according to new research from Colliers International.

The top markets from the report include Manhattan, Washington DC, Chicago, Houston, Los Angeles, San Francisco, Atlanta, Dallas, Seattle and Boston. Among these markets, Chicago was the only city to see positive absorption in the third quarter, but the report expects this to be temporary. It also wasn’t enough to offset the losses. Together, all 10 markets had 15.7 million square feet in negative office absorption, accounting for nearly half of the 37.1 million square feet in total negative office absorption nationwide.

Negative absorption came hand-in-hand with rising vacancy rates. With the exception of Chicago, vacancy increased in all of the top markets. Tech-heavyweights San Francisco and Boston had the biggest jump with vacancy rates rising 160 and 220 basis points respectively in the third quarter. Manhattan’s vacancy rate increased 170 basis points, while Los Angeles saw a 160 basis point bump in vacancy. On the other hand, Chicago’s vacancy rate fell 20 basis points, thanks largely to leasing activity that produced 228,309 square feet of absorption.

In addition, all 10 markets showed the beginning signs of rent declines. In Manhattan and the San Francisco Bay Area, the reality has already set in. The remaining markets had flat rent growth, meaning any change was less that 1%, according to the Colliers report.

The sublease market has added additional pressure for office owners. US sublease space is up 35% to 170 million square feet in supply. Manhattan leads the nation with 3.1 million square feet of space, but San Francisco, Seattle and Los Angeles have all seen significant increases in sublease supply as well. Tenants are finding significant discounts in this alternative market, with an average 23.9% discount over to direct lease space in class-A properties. However, the discount varies wildly between markets with Houston posting a 50% discount on average for sublease space, while sublease space in San Francisco was reduced 11.3%.

This alternative will likely ensure more challenges ahead for direct office owners, and unfortunately, the sublease market is growing rapidly. A September report from Cushman & Wakefield showed a 21.3% increase in sublease supply in the first half of the year. In the third quarter, that number jumped to 35%.