Office Occupancy Losses Were Unprecedented in 2020

Office occupancy losses hit record lows in 2020. A new report from JLL calls the occupancy decline unprecedented with 84 million square feet in occupancy declines for the year. In the fourth quarter alone, occupancy losses totaled 40 million square feet.

More than half of the occupancy declines happened in CBD markets, and within CBDs, occupancy declines were greatest among commodity product. Class-B office buildings, for example, had occupancy decreases one-and-a-half times faster than class-A and trophy assets. Gateway markets have led the occupancy losses. Nearly 30 million square feet of give-backs occurred in New York and San Francisco. This is 2.2 times the national rate of national occupancy losses.

Negative net absorption followed a similar trend. Expensive markets with a high concentration of tech-and energy-companies, including Seattle, Boston, New Jersey and Los Angeles, had the largest decline in office absorption, according to the research from JLL. The occupancy losses pushed the vacancy rate up to 17.1% nationally. In CBD markets, the vacancy rate increased twice as fast as the national rate.

Secondary, tertiary and suburban market, however, told a different story. These markets proved to be more resilient for office activity. This was due to a combination of inward migration—a popular trend through the pandemic—as well as more diversified job markets that helped to provide stability. According to the JLL report, metro areas with less than 60 million square feet of total inventory had negative 1.3% net absorption, 60 basis points lower than the national average.

In the near-term, JLL expects this trend to continue. CBD office markets will continue to struggle, while secondary and suburban markets will prove more resilient with fewer occupancy losses. This will especially be true for commodity product. Due to the market dislocation, there has been a flight to quality, and tenants willing to move are rewarded with concessions and attractive rents on class-A product. These properties also offer amenities that are in high demand, like higher-quality ventilation and maintenance systems for employee wellbeing.

In the longer-term, JLL expects improved leasing velocity and stronger absorption, starting in 2021. Job growth supports the theory. An earlier report from Newmark shows that more than 30% of private sector office-using jobs lost in second quarter were recovered by the end of the third quarter, especially in top-tier office markets. This supports a story for strong for office recovery and office usage as the country enters an economic recovery.