The Office-Demand Debate: Cushman & Wakefield Sounds a More Positive Tone

Reports are varying about how much demand there is for office space. So, depending on which report proves accurate, office space demand could recover sooner rather than later.

A recent indicator was a bit sobering: In-person tour volume dipping in July, according to the VTS Office Demand Index.

Cushman & Wakefield, by contrast, has noted that the office sector is seeing many green shoots favorable to future demand. The key question is, when will these positive signs materialize into tangible leases. The short answer is no and yes.

Leases in the six U.S. gateway markets are expected to take 15% longer (126 days on average versus 110 days in non-gateway markets). This is a change from the first half of 2019 when the average time was nearly identical for both gateway and non-gateway markets.

Twenty-eight percent of new lease square footage signed in 2021 H1 was scheduled to be occupied before June 30, 2021. Nearly half is planned for move-in during the second half of this year—30 percent in Q3 and 18 percent in Q4. Another 16 percent will be occupied in the first half of next year and the remaining 8 percent is over a year away.

Q2 2021 marked the fifth quarter in a row of negative net absorption and is similar in volume to the last three quarters (all between -36 and -41 msf). National vacancy increased for the seventh straight quarter to 17.2 percent.

New leasing and renewals jumped quarter-over-quarter (QoQ) by 18% and 7%, respectively, in Q2 2021. New leasing was stronger than in any of the previous four quarters. And the four-quarter rolling total of new leasing appears to have bottomed out in Q1, increasing by 11 msf in the most recent quarter—the single-largest increase since Q1 2017.

The Lag from Signed Leases to Occupied Spaces

Looking at activity in the first half of 2021, a few things can be surmised about when absorption will start to impact the market, C&W reported.

There is, of course, a lag between when new leases are executed and when tenants physically occupy the space, which is when net absorption is realized. In the first half of this year, that lag has averaged 117 days (or just under four months), down from 2019 H1 when the average was 140 days, which may indicate some urgency among occupiers who sat on the sidelines for most of 2020 and have now resumed actively exploring their lease options.

The five-year average leading up to the pandemic for leases of 5,000 sf or more was 134 days (or 4.4 months). As one might expect, the larger the lease, the longer the gap between lease execution and move-in. A smaller lease may involve several months of searching and then approximately a quarter to go from lease signature to occupancy. The touring, negotiation, lease signature and move-in process for a larger lease, however, can take four to six quarters or more.

The average gap between lease execution and expected occupancy for 2021 H1 leases of over 50,000 sf is 282 days (nearly nine-and-a-half months). In other words, large leases signed in April, May or June 2021 will not, on average, show up in absorption statistics until Q1 2022.

The impact on net absorption in a given market will be determined by the degree to which these new leases are net-expanding. Tenants that are new to the market altogether and those that are relocating and increasing their space requirements will produce positive absorption.

Conversely, any intra-market moves where the new leases are for less space will still produce net-negative absorption for the market. The length of time that occupiers plan to take between lease execution and space occupation varies across geography, submarket and class.