Demand for office space has been hit hard over the course of the pandemic due to shutdowns and increased use of work-from-home (WFH) policies. In early 2020, the adoption of WFH was considered temporary for many companies, especially for office tenants new to allowing employees to work remotely. Remote work before the pandemic was more likely to be available in tech-related jobs. The pandemic forced more widespread use of WFH by companies previously hesitant to allow remote work, such as in the financial services industry.
The expanded use of WFH policies brought its benefits into focus, including shorter commute times and productivity enhancements for some types of work. WFH is now a more common element of flexible work arrangements for office employees. The office market impact has included reduced leasing activity and increased sublease space availability.
According to CBRE Group (NYSE: CBRE), the U.S. office vacancy rate was 16.5% in the second quarter of 2021. Office vacancy ended 2019 at 12.1% and edged up just 20 basis points (bps) in the first quarter of 2020, before soaring another 420 bps over the following 15 months. At 16.5%, office vacancy is near its 16.8% peak from the great financial crisis.
This increase in vacancy only accounts for office space available to lease directly from the property owner. Sublease space has also increased as tenants seek to reduce part or all of their existing office leases through subleases to other tenants.
Using monthly data, CBRE reports that 160 million square feet of office sublease space was on the market as of August 2021, up from 90 million square feet on the market before the pandemic. This 78% increase from March 2020 to August 2021 hides the deceleration in new additions to sublease space.
Office market conditions seem dire according to space availability, but demand has been coming back to life in 2021. More tenants have been looking for space this year, and leasing activity began to pick up in the spring. Plus, August 2021 was the first month that sublease space availability declined since March 2020.
The CBRE Pulse of U.S. Office Demand is a monthly tracker of office tenant activity in the largest 12 office markets, covering tenants in the market for space, leasing space, or adding sublease space. The markets included in this analysis are:
For all markets combined, new sublease space additions have been slowing since summer, while more tenants have been looking for and leasing office space. In August 2021, aggregate office tenants in the market flattened versus July and leasing activity moderated over the month.
Of the 12 largest U.S. office markets, Boston is leading the office demand recovery. The CBRE Pulse report indexes office tenant activity by market to make this determination, and Boston has the highest August 2021 Tenant in the Market Index, at 124. Boston ranked first by this index for all but two months since the pandemic began in March 2020.
For comparison, Dallas-Fort Worth ranks second at 92 in August 2021, and Atlanta is third at 91. The bottom two markets for August tenants in the market are Houston, with an index value of 68, and Chicago at 62.
Why Boston office?
Boston is an office hub for the tech and life sciences industries, which have been more resilient to pandemic-related economic weakness. In addition, these industries are less impacted by the recent shift in WFH policies. For tech, WFH was already feasible for many employees and, for life sciences, WFH is rarely an option because employees need to be in the lab. As a result, Boston is in a league of its own for office tenants looking for space.