REIS Revises Office Forecast But Still Expects Significant Rent Declines

Office demand may not “die” anytime soon, but it’s definitely changing, with big shifts expected to play out in the intermediate to long term and the national vacancy rate forecast to rise to “near-record levels” in 2021 before beginning a slow decline starting in 2024.

A new report from Moody’s Analytics REIS predicts effective rents will decline 7.5% this year—a significant number, to be sure, but not quite to the level of the Great Recession, when effective rents fell 8.9% in 2009. REIS analysts point out that even in New York City, a metro that’s been synonymous with the precipitous declines wrought by COVID-19, effective rents showed a fraction of the declines they expected last year: asking rents fell by 1.0% (after they expected a fall of 4.4%) and effective rents declined by 2.4% (versus an anticipate decline of 8.6%). 

And while fairly large declines in rents are still forecast for New York City in 2021 and 2022,  “unlike multifamily, we have, as a whole, revised our expectations for the office sector towards less severity in the near-term,” the report states. “However, anticipating the longer-term nature of how the office sector may evolve as a response to the COVID crisis, we have also extended the time period before the expected recovery ensues…If the so-called office apocalypse has indeed been cancelled (for now) this does not mean that distress is not present; neither does it mean that there was no distress throughout 2020. The distress was simply very uneven.”

For example, while national figures for vacancy and rents are fairly mild, certain markets were hit harder than others. The top ten markets for effective rent declines in 2020 show an equal number (five) of both CBD and non-CBD markets, countering the argument that the pandemic’s worst was centered on dense urban areas. But some of those areas are quite small, particularly when compared to New York, the nation’s largest office market.

Consider Syracuse, where both CBD and non-CBD areas sustained a relatively large effective rents decline in 2020. REIS chalks this up to demand as opposed to supply, as the city lost 9.3% of its office-using employment base (versus a national average of 4.5%)—a number that’s only surpassed by markets like Las Vegas. Only a handful of other markets like Las Vegas had office-using employment decline by close to Syracuse’s figure. 

But as we look toward 2021, REIS expects seven out of the top ten effective rent declines to come from CBDs and larger markets, led by both CBD and non-CBD forecasts in San Francisco and other tech hubs.  And experts agree that demand will likely be higher in secondary markets—particularly those with easy access for workers—and slightly lower or stagnate in primary or more urban markets.