Office Leasing Activity Weakens in Key Markets for Q4

The office market in Q4 is a tale of two bifurcated office markets. On the one hand, primary office markets that account for much of the office footprint continue to suffer declining occupancy and rent growth. On the other hand, secondary/tertiary markets are experiencing rising occupancy and rent growth, the National Association of Realtors reported. 

Overall, amid the economic uncertainty wrought by the emergence of the omicron COVID variant, fewer leases were signed and office occupancy fell again in 2021 Q4. 

The office market recovery remains bifurcated, with rent growth in nearly all office markets except 13 metro areas among which are the primary commercial markets: New York, San Francisco, Chicago, Los Angeles, and Washington, D.C.

About 2022

Looking ahead, with the impact of the Omicron variant imperiling the demand for office space in 2022 and with the pipeline of construction, the office vacancy rate is likely to increase in 2022 from the current rate of 11% to 13%. 

Rent growth will remain flat or increase minimally, at 1% to 2% in the major primary markets such as New York, San Francisco, Chicago, Los Angeles, and Washington DC. However, office rents are likely to increase at a stronger pace in Boston, at 2% to 3%.

Leasing activity weakens in 2021 Q4

Signed leases during 2021 Q4 decreased 36% from the prior quarter to 57 million square feet and 11% from one year ago. Prior to the pandemic, the total leases signed hovered at around 100 million to 120 million square feet on a quarterly basis.

After office occupancy increased by 5.7 million square feet in 2021 Q3, occupancy fell 12.6 million square feet in 2021 Q4 (negative net absorption), bringing the total net decline in occupancy since 2020 Q2 to 145 million square feet, according to NAR’s analysis of CoStar market data. 

Of the 390 markets tracked by CoStar that NAR used in its analysis, 229 out of 390 (59%) markets have positive net absorption over the past 12 months as of December 2021.

After occupancy rose in the third quarter, office occupancy declined again in New York (-11.7 MSF) and in San Francisco (-4.5 MSF). Occupancy continued to decline in 2020 Q2 in Chicago (-3.9 MSF), Los Angeles (-3.8 MSF) , and Washington (-0.5 MSF). However, office occupancy increased in Boston (1 MSF) due to robust demand from the booming life science industry in the area. 

The recovery of office occupancy appears to be more solid in San Jose, Houston, Miami, and Dallas. However, secondary markets like Atlanta, Denver, and Seattle also suffered a decline in office occupancy in the fourth quarter after office absorption rose in 2021 Q3.

As of 2021 Q4, only 13 out of 390 markets had lower average office asking rent compared to one year ago, that includes in New York (-1.8%), San Francisco (-4.0%), Chicago (-0.1%), Washington DC (-0.7%) , Orange County (-0.9%). 

Rents are rising strongly in secondary office markets, especially in the Sunbelt states, specifically Florida. In the metro areas with a population of at least 1 million, the largest year-over-year increase in average office asking rent are in Palm Beach, Providence, and Tucson with rent growth of over 4%.  In metro areas with a population of at least 500,000 to 1 million, the metro areas with the highest rent growth are Sarasota and Reno. Among metro areas with a population of below 500,000, Naples and Sebastian-Vero Beach in Florida also posted the highest rent growth.