- Effective U.S. office rents, which include concessions, fell 6.8% to $25.01 per square foot in the fourth quarter compared to the year-earlier period and are forecasted to bottom out in the middle of this year at $24.73 per square foot before beginning to recover, according to Cushman & Wakefield’s Q4 Marketbeat office report and David C. Smith, global head of Occupier Insights at the firm. Effective rents have fallen 13.3% since the second quarter of 2020.
- By contrast, national asking rents for office space, which do not include concessions, ticked up 3.2% in the fourth quarter to $36.04 per square foot, he said. Asking rents tend to lag rising vacancies and shifts in demand because landlords typically seek to hold onto “face rents” even as they provide periods of free rent and other concessions to sweeten deals. Cushman expects asking rents to decline in the coming 12 months.
- Meanwhile, the national office vacancy rate rose to 17.6% in the fourth quarter, the highest point in nearly two decades, or since 3Q 2003, and the ninth straight consecutive quarterly increase, according to the report. While new leasing activity is trending higher, both excess space given back by tenants that is available for subleasing and new construction will continue to contribute to higher vacancies this year.
With the office market facing further uncertainty as companies push back their return to office plans due to the COVID-19 omicron variant, lower office rents should continue to give CFOs some relief from the rising price pressures they’re battling on other fronts.
“It’s more of an occupiers’ market today than it has been for a while and I think it will be for 2022,” Smith told CFO Dive. Still, the sector is showing signs of stabilizing, with more tenants in the market and vacancy increases starting to moderate.
“We believe we’ve hit the bottom," Smith said. "Vacancy did increase in Q4 but it’s starting to slow down. So, the expectation is that while there is some opportunity for cost savings for companies right now, there is a limit on that.”
The office sector’s outlook has been upended by the pandemic and the shift to more at-home and remote work and some are questioning what the future will look like for certain central business districts, like those in Chicago that, at least for now, have fewer workers.
Early in the pandemic many companies said they would have smaller real estate footprints going forward because of the pandemic, with 31% of finance leader respondents to a LeaseQuery survey saying they were reducing their real estate footprint and 18% saying they were reducing their real estate leases. In a recent Deloitte survey, 41% of respondents said they expected to shrink their real estate footprint this year while 88% said they would use a hybrid work model.
But Smith said it is too early to determine the full impact of the hybrid work model. First, it’s difficult for a company to reduce space because they typically need to prepare for the possibility that all employees come to work on the same day. In addition, he said, hybrid work models can lead to companies wanting less individual space but more collaborative space to accommodate a renewed emphasis on meeting when people are in the office at the same time.
“Companies are trying to figure that out on a trial and error basis,” he said.