Despite the COVID-19 pandemic sending workers home, office occupancy remains surprisingly stable nationally, according to Reis’ Q2 2020 Office Market Rankings.
In Q2, the office vacancy rate ticked up 10 basis points versus the first quarter, and 30 basis points from the end of 2019. Asking rents decreased 0.1% in Q2 and effective rents dropped 0.3% for the period.
Still, some cities are performing much better than others. The strongest office markets in Q2 were on the West Coast, with Seattle posting 4.5% effective rent growth from Q2 2019 to Q2 2020. San Jose was second with a 4.1% increase in the same timeframe. Charlotte (3.9%), Austin (3.4%) and Oakland-East Bay (3.2%) rounded out the top five.
The largest declines in effective rent growth weren’t that massive, considering the economic turbulence in Q2. San Antonio saw effective rent growth decline 1.2%, while New Haven experienced a 1.1% drop. Tucson (-0.7%), Fairfield County (-0.7%) and Rochester (-0.6%) rounded out the bottom five.
While the damage has been limited so far, Reis noted that it often takes a couple of quarters after a recession officially begins before office landlords begin lowering asking rents.
“The dynamic proceeds like this: concessions will begin to be offered as sublease activity spikes and businesses retrench, but asking rents will remain stable—until landlords accept that they have to lower face level asking rents given economic conditions,” Reis said in the report. “Today we are seeing asking rents decline, albeit slightly, within the very first quarter of economic deterioration – this isn’t a surprise, unfortunately, just given the relative speed and severity of this downturn.”
A recent report from Colliers International also found that asking rents are holding up for the time being. Absorption and vacancies were moving in the wrong direction, though.
The Collier’s team found that net absorption fell in each of the top 10 markets in the second quarter, with eight markets posting negative numbers. Vacancy rose in eight of the 10 markets in Q2 2020.
Other recent reports paint a similar picture of the vacancy situation. Total office vacancy ballooned 13 percent in the second quarter, with 7 million square feet of new supply coming online, according to UBS Asset Management’s quarterly Real Estate Outlook. The report also said that tenants are trying to decide whether to reduce space while maintaining work-from-home or creating more socially distant workplaces.