The health crisis caused an unprecedented disruption in the office sector, triggering a domino effect in market dynamics and trends. On a year-over-year basis, national average full-service equivalent listing rates decreased by 1.0 percent in December, clocking in at $37.76 per square foot, or a 24-cent drop from the previous month. On a similar note, the national vacancy rate increased by 40 basis points, reaching 14.2 percent.
Gains in average listing rates were led by Nashville—6.6 percent—as the secondary market managed to attract young professionals in times when remote work became an opportunity to move away from densely populated, high-priced cities. Primary markets such as San Diego or San Francisco saw out-migration, leading to drops in same-store rates of -11.7 percent and -7.3 percent.
Office-using employment decreased by 3.4 percent year-over-year as of December, mostly due to furloughs and layoffs. Of the 120 markets covered by CommercialEdge, only 16 showed growth in office employment. Among them was Austin with a staggering 6.4 percent year-over-year increase, largely due to its improving financial services and tech sectors.
Although the apparition of a COVID-19 vaccine is some sign for optimism, it won’t act as an immediate cure for the struggling office market. As companies continue to reevaluate their office presence in the post-pandemic landscape, unexpected trends—such as the transformation of vacant commercial buildings into multifamily—continue to emerge. These conversions would relieve the stress of rising vacancies while increasing the affordable housing issue dense urban locations have been facing.
Despite the temporary halt on non-essential construction, 67.6 million square feet of office space came online last year. The bulk, 93.4 percent, consisted of premier office product, signaling the continuation of tenants’ flight-to-quality trend. Charlotte had the highest level of square feet underway as a percentage of stock (11.5 percent), followed by Austin (10.8 percent). These midsize markets accounted for almost 10 percent of the nation’s underway office stock thanks to high levels of domestic in-migration.