Southern Momentum Markets to Dominate Office Comeback in 2021

The future of office demand is in question as companies continue to hold off on expansion plans and growth strategies while COVID-19 vaccine rollouts continue, with some markets reaping the benefits of in-migration patterns while other gateway cities bleed out.

A report on the office sector from Marcus & Millichap shows that while corporate leaders know they’ll have to bring workers back at some point, there’s little agreement or consensus over when that will be.

“Most employees, particularly younger staff members in the early stages of career development, prefer to return to the office at least some days where they can more easily collaborate, build relationships and be mentored,” the report states. “Until the health risks are addressed, however, companies are reluctant to place their employees at risk.”

Many companies are negotiating short-term lease extensions as they grapple with questions regarding at what level their employees will return to the office, and how those returns will impact space allocations.

“This created a significant band of variance in the outlook for office space demand—if a significant portion of the labor force continues to work from home after the pandemic, then the need for office space will likely fall, but if companies expand the allocated space per employee, space demand could remain stable or even grow,” the report states.

The report divides major American cities into five categories based on office demand. Momentum markets—which include cities like Atlanta, Charlotte, Minneapolis-St. Paul Raleigh, Tampa-St. Petersburg, and West Palm Beach—are either outperforming the US average or holding steady as they contend with migration from denser urban areas. Most of the cities in this sector are in the Sunbelt and the South, in areas with lower-cost housing. 

Metros in the in-migration tailwinds segment are experiencing vacancy rates that are moderate or higher than the US average thanks in part to restrained negative absorption. Cities with growing tech employment like Seattle-Tacoma, Boston, and Indianapolis are seeing significant in-migration, thanks to higher job gains. Other cities on the list include Houston, Kansas City, Orlando, Phoenix, San Diego, St. Louis, and Washington, D.C.

Cities in the “nearing recovery” segment have shown a temporary loss in absorption, but M&M analysts say a restrained development pipeline won’t lead to an overdevelopment problem. Most of the cities on this list are smaller Midwestern markets like Louisville, Cincinnati and Cleveland, which also have less available sublease inventory; other markets in the segment include Baltimore, Fort Lauderdale, Las Vegas, New Haven-Fairfield County, Oakland, and Pittsburgh.

The development overhang category is characterized by rising vacancy, thanks mostly to increased inventory as leasing has slowed. Markets in this category tend to be those with a growing population and tech employment base that are experiencing supply pressures as sublease space increases. The cities include Austin, Chicago, Dallas-Fort Worth, Miami-Dade, Nashville, Salt Lake City, San Antonio, and San Jose.

Finally, the cities in the protracted recovery phase were particularly hard-hit by the pandemic and showed significant amounts of negative absorption and rising vacancy.  The segment includes gateway metros like Los Angeles, New York City, and San Francisco, as well as Denver, Detroit, Milwaukee, Northern New Jersey, Orange County, Philadelphia, and Portland.