How did COVID-19 hit the office markets and will the office rents recover?
 The COVID-19 pandemic has kickstarted the work-from-home trend, which will likely remain a significant factor in the activity in the office markets.

The outlook for the office markets across the United States might still appear murky but silver linings are starting to show as the economy maintains its momentum amid the vaccine rollout and the resurgence of consumer confidence. How will the office market fare in the next few months and what should office investors do?

# How did office markets perform in recent quarters?

The first three-month period of the year witnessed a subtle rise in the number of vacant office across the United States, with the national average vacancy rate increasing to 14.2%, according to Colliers.

Houston had the highest share of empty offices among all markets, with its vacancy level still above 20%. On the other hand, Central Idaho was the tightest office market, with only 2.3% of its offices sitting empty.

The overall net absorption in the US office markets fell by over 46m sq. ft., setting a new quarterly low. New York City led the decline, with a 12.2m sq. ft. decline in net absorption level. Los Angeles and Dallas-Fort Worth also registered substantial dips.

There is an expected surge in office spaces over the coming quarters given the elevated construction figures. During the first quarter of the year, 136.1m sq. ft. of office space was under construction, higher than the 125.2m sq. ft. — the previous cycle peak — achieved in the second quarter of 2008.

San Francisco Bay Area rose as the top market with the highest office construction activity. Over the first three months of the year, around 18.3m square feet of office space was in construction in the market.

New York City Metro followed, with 14.9m sq. ft. under construction. Washington D.C. (8.9m sq. ft.), Austin (7.8m sq. ft.), and Atlanta (7m sq. ft..) complete the top five markets with the busiest office construction activity.

# Will office rents recover?

Office rents seem to be in the midst of recovery across the US markets. In fact, the National Office Report by CommercialEdge showed that the average office lease rates across the country have increased by 1.4% on a yearly basis in March, resting at $38.67 per sq. ft.. On average, listing rates for office buildings with a size of 50,000 sq. ft. or larger increased by $0.36 from the previous month.

Offices in Manhattan had the most expensive rents during the month. The city reported an average listing rate of $85.82 per sq. ft.. San Francisco followed with lease rate hitting $69.66 per sq. ft..

Bay Area registered the third-highest average listing rate at $57.11 per sgft. On an annual basis, the region reported the highest year-over-year growth at 8.6%. The office market of Washington, D.C. clocked the second highest rental growth at 6.4%, followed by New Jersey with 3.9%.

However, a prediction by Moody’s Analytics CRE Solution earlier this year indicated that the office sector will likely suffer more this year than it did in 2020. The average rents across the US office markets were projected to drop by 7.5% this year before stabilizing in 2022.

Silicon Valley is expected to bear the brunt as San Francisco might realize an overall decline of 15% this year. The odds are also against New York, which could potentially record an 8.9% decline in rents. Overall, national rents have a possibility of declining by 1.8% over the year, driven by the drops in these two cities. However, the continuous vaccine rollout and a sustained economic recovery could see both markets post a turnaround in 2022.
[{"id": "h9zfo3a", "text": "So, I'm new to CRE but working in research at a reputable company and have access to some pretty great data. Office vacancy, cap rates, and absorbency are entirely location dependent, but in general we saw a mass exodus. The market I cover went from about 10% vacancy to almost 18%, absorption was in the negative 100s of thousands YoY, and cap rates are through the roof. \n\nMy estimated guess is that this will be a lingering issue for the next few years. However, remote work will not be a permanent staple in the long run. Why? Managers, CEOs, and higher-ups in general want to be able to see what they're paying for. \n\nI've worked both remotely and in office in the past few months and while remote work is more laid back and definitely better from an employee satisfaction point-of-view, the ease of communication and focus that comes with in-office work is a big part of why offices became an important part of work in the first place. \n\nIt is likely that larger offices will downsize slightly and adopt some form of hybrid model, yet the scheduling and extent to which they will downsize is entirely dependent on trends that aren't current available.\n\n&amp;#x200B;\n\nTl;dr: Offices will make a comeback eventually, but a full return to office work is not foreseeable based on WFH trends and overall market sentiment.", "replies": [{"id": "h9zyb4r", "text": "&gt; Why? Managers, CEOs, and higher-ups in general want to be able to see what they're paying for. \n\nMy caution to this is they may not have an option.  WFH is a **massive** factor to skilled employees.  Just cutting 1-2 hours of commute time daily is worth a lot.\n\nWhat I'm seeing on the tech (engineer) side is massive recruiting issues (and by massive I mean literally zero accepted offers) if you don't allow WFH.", "replies": [{"id": "ha04rqs", "text": "I think it\u2019ll rebound, just not fully. It\u2019s still way too early to make long term predictions. COVID itself is still causing disruptions and it\u2019ll be a few years I think before the dust settles and we actually have the \u201cnew normal\u201d.\n\nI think short term companies will compete by offering more flexible WFH policies. However, I think long term, allowing employees to WFH entirely will bring some consequences to light. For one, employees on boarded remotely will feel less connected to their new environments and colleagues. This will lead to high turnover. Finding a job has never been easier and it\u2019s never been easier to quit, you don\u2019t even need to leave your home to land a new one.\n\nSecondly, I think a lot of innovation occurs in random interactions between colleagues. While many companies havent seen productivity drop, I think with WFH employees have a tendency to focus on completing their tasks but overlook collaboration and bigger picture goals. I don\u2019t think 18 months of data is enough to really predict that innovation and long term company value won\u2019t suffer by going completely remote.\n\nFinally, touching on the first point I think while companies are competing based on schedule and work flexibility in the interim, I think the top companies in each industry will be able to command employees that wish to work for them to come into the office. Jamie Dimon touched on it, how long can employees who get NYC salaries live in affordable cities before companies start slashing salaries for those who chose to work remotely? NYC salaries are higher in part because of the cost of living in NYC. There will be companies where if your priority is work life balance you can opt for that but the cream of the crop companies will be able to entice employees who prioritize salary/career path to go back into the office.\n\nAs for the office market in general I think there is still more pain. Many if not most companies  will implement some hybrid model and on the whole will require less office space. Companies will have more leverage in negotiating lease rates because now as an office LL you\u2019re not just competing with other office buildings but the WFH concept as well.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ha0ldeh", "text": "I wonder if the OP feels his or her post gets better the more times they post it.", "replies": [], "depth": 1}, {"id": "ha5l28v", "text": "Im betting on a 30% fall in typical staff numbers in the office each day, slightly balanced by a 20% fall in occupational densities\n\n&amp;#x200B;\n\nAllowing for headcount growth thats broadly a 10% reduction in gross floorspace need for most metros. \n\n&amp;#x200B;\n\nPainful but not seismic", "replies": [], "depth": 1}, {"id": "hcr3m1f", "text": "This is very interesting", "replies": [], "depth": 1}]