In Q3 2020, the office sector entered a period of turbulence, caused by the current economic crisis. The U.S. Sum of Markets vacancy rate increased by 100 bps to 14%, marking the highest quarterly vacancy increase in two decades. Space demand shrunk by 30 million sq. ft., marking the second highest decline in demand on the record since 2001.
However, the increase in vacancy and decline in demand didn’t lead to substantial rent declines, with the TW Rent Index dropping just -1.6% nationally. Mild softness in rents can be explained by the continued freeze of U.S. office markets due to the pandemic, when tenants put decisions regarding office space on hold.
Currently in our baseline scenario, office markets are expected to bottom out by the end of 2021, and will reach substantial recovery in rents and vacancy by the first half of 2023. Big unknown factors at this moment are how much remote working and social distancing will affect office space demand. There are a variety of opinions regarding whether those trends persist after the pandemic ends or disappear after the mass-scale deployment of an immunization. In our current baseline scenario, we took a conservative approach by assuming that the historical relationship between office employment and office space demand continues to hold, and that we experience a stable economic recovery in the next few years. In addition to the baseline, CBRE EA also produces additional macro and CRE scenarios to give our clients a full range of potential outcomes.