Office Sublease Overhang Eased Slightly In August

New concerns about the spread of COVID-19 variants slowed the US office market in August, but the availability of office space for sublease improved for the second straight month, allaying some experts’ concerns about the near-term recovery for the sector.

A new report from CBRE tracking key indices of office market activity in 12 major US cities found that the sublease availability index fell in August after declining in July, though “sizeable” backlogs of space remain. Overall, Boston and Atlanta are registering the strongest comebacks, with the latter showing particularly strong gains last month. Los Angeles follows behind thanks largely to a slump in leasing last month. And in the next tier of markets CBRE analyzed for its report, Dallas-Fort Worth, Seattle, Washington, D.C., Manhattan and Houston have all shown modest improvement.

Nationally, the number of tenants in the market (TIM), defined as companies actively seeking office space, declined slightly after six straight months of gains, as did leasing activity as measured by finalized lease agreements. Overall, the decline nationally in tenants in the market is likely due to renewed caution by occupiers in the wake of an uptick in COVID-19 cases and the rise of the Delta variant, though some of that decrease can be attributed to the conversion of some tenants in the market to leases.

The TIM index in Dallas-Fort Worth, Atlanta, Seattle, and Philadelphia all registered gains in August, and Boston’s TIM index is “well above” pre-COVID levels. Atlanta and Dallas-Fort Worth are within 10 points of their pre-COVID numbers. On the flip side, Denver showed a decline of 19 points and Chicago slumped 9 points.

CBRE’s Leasing Activity Index declined to 71 in August, a slump from 77 in July “but still well above its cyclical low of 52 from December 2020,” the firm said in a statement. Five of the 12 markets CBRE analyzed in its report showed increases in leasing activity in August with Atlanta registering a 17-point improvement in its index, boosting it nearly to pre crisis levels. Showing modest improvement were Houston, Manhattan, San Francisco and Chicago.

“We saw a small to modest slowdown in tenants seeking space and for signed leases in August,” said Nicole LaRusso, CBRE Senior Director of Research & Analysis. “Transactions that were close to completion continued forward, despite the unfortunate rise in infections and related delays in return-to-the-office plans. The good news is that sublease availability didn’t increase in the wake of the latest increase in COVID cases. This is welcome news, because the sublease situation is perhaps the biggest hurdle for markets to overcome on their way to full recovery.”

Half of the markets CBRE analyzed posted declines in their sublease indices, with Seattle showing the biggest drop. But the amount of available sublease lease still remains twice its pre-COVID level, according to the firm.

“We knew that the spread of COVID’s Delta variant would affect the office-market recovery, and the August index results bear that out,” said Julie Whelan, CBRE Global head of Occupier Research. “The question is whether this is a momentary pause in the recovery or something more. It is possible that federal and corporate vaccination mandates could boost COVID- containment efforts and, by extension, nudge America’s return to the office back on track.”

Asking rents for the sector stagnated in August at an average of $38.72 per square foot, according to a survey of the 50 largest U.S. office markets by Commercial Edge. And some experts say it could take a year or more for occupancy to recover.

“Major metro occupancy rates will not return to pre pandemic levels anytime soon,” Michael Silver, chairman of Vestian, told GlobeSt.com in an earlier interview. “I estimate occupancy rates at 70-80% of pre pandemic levels by year end 2022.”