Things are getting ugly in the US office markets, working from home is showing


Oil Bust Houston hardest hit. Once the hottest US market, San Francisco is indulging in it, followed by Los Angeles, Chicago, Washington DC, Seattle and Manhattan.

By Wolf Richter for WOLF STREET.

A nightmare has unfolded. There were problems before home office and “hybrid work models” reduced the current and future real estate needs of office tenants in the major US office markets. And now the office space has been reduced, and companies are offering their rented but vacant office space on the sublet market, undercutting landlords who want to rent vacant offices directly.

Houston has been the hardest hit major office market in the US since the 2015 oil crisis collided with a phenomenal office construction boom. Soon the availability rates were over 20%. But in the second quarter of 2021 they are over 31% – which means that almost a third of the office space is on the market! And San Francisco, the hottest and densest office market in the United States three years ago, is now indulging in a historic Houston office overflow.

And “advertised rents” in this environment are no indication of the actual rental conditions and agreed concessions. For example, real estate services company Savills notes that in Washington DC, “Concession packages for new, long-term Class A leases now average 147.00 psf (per square foot) of tenant improvement allowance and 23 months of free rent totaling $ 270.00” psf in total – an increase of 30.9% since the pandemic began. ”This compares to the advertised asking rent of $ 58.46 psf.

Houston, first the oil spill, then home work.

The Houston office market is huge at 192 million square feet (msf) of office space. According to Savills, 31.3% of this is currently on the market for rent. In relation to class A office space, 33.3% is available for rent.

According to submarkets, availability rates range from 10% in the Medical Center / South Houston to 52% in the North Belt / Greenspoint. Availability in the Central Business District is 34.7%. These are the effects of years of oil and gas bankruptcies, downsizing, layoffs and, since 2020, the effects of working from home (graphic via Savills).

Leasing activity decreased by 41% to 2.0 msf compared to the second quarter of 2019.

Landlords have their receivables rental philosophy. Asking rents – $ 33.42 per square foot (psf) per year for Class A space and $ 28.96 psf total – haven’t moved in years. All transactions that landlords do with potential tenants – including lease terms such as rent, free time, improvement allowances and other perks – are not included in this data.

San Francisco, office shortages are turning into historic office glut.

San Francisco, the epicenter of homework, saw a number of large employers packing their bags and going to cheaper pastures. This started long before the pandemic, and office availability began to increase in the second quarter of 2019. But it turned into a stream during the pandemic. Some of these moves were across the bay to Oakland; other companies moved to other states, including Charles Schwab, which moved its headquarters to Texas, although it continues to rent mostly empty office space in the city.

According to Savills, the sublet portfolio rose to a new all-time high of over 9 msf in the first quarter. The overall availability rate increased to 26.3% and the availability of Class A to 24.0%, compared to 7.7% and 7.3% in the second quarter of 2019. By submarket availability ranged from 21.9% in Mission Bay / Showplace Square up to 35.5% in South of Market and 39.2% in Jackson Square (diagram above Savills):

Asking rents continued to fall to $ 75.45 psf per year for class A space and a total of $ 72.55 psf, a decrease of 11.9% and 9.1%, respectively, compared to the second quarter of 2019 . This does not reflect the actual rental terms, which are complemented by free rent and other concessions.

Leasing activity recovered somewhat from the near-zero levels of the previous quarters, but lagged behind at 1.1 msf, 62% from Q2 2018 and 56% Q2 2019. About 40% of the leasing activities were extensions.

los Angeles

The sublet space rose to an all-time high of 9.2 msf and the overall availability rose to 24.1%. By submarket, availability ranged from 8.8% in Burbank to 38.0% in Fox Hills / Marina:

The letting volume in the second quarter was 3.1 msf, 42% below that of the second quarter of 2019. 38.5% of the total rent was renewals.

As rents keep rising, landlords are aggressively competing for deals by offering better rental terms and all kinds of concessions. Overall, asking rents rose to $ 3.84 per month ($ 46.08 per year) and Class A rose to $ 4.04 per month ($ 48.48 per year), both more than 6% more than a year ago.

Downtown Chicago.

Given the increasing availability of subleases, total availability increased to 21.9% in the second quarter. By submarket, availability ranged from 15.9% on North Michigan Avenue – the only submarket under 20% – to 28.0% on Far West Loop / Fulton Market. Class A availability increased to 17.6%:

The leasing activity of 1.4 msf decreased by 52% in the 2nd quarter compared to the 2nd quarter of 2019 and by 62% compared to the 2nd quarter of 2018. More than half of the lease agreements signed were extensions.

Asking rents have fallen very slowly, reaching a total of $ 40.40 psf per year and $ 45.90 psf for class A in the second quarter, roughly the same as in 2017.

In Washington DC, “record concessions have already skyrocketed”.

Overall availability rose to a record 21.1% in the 2nd quarter. This includes 2.5 msf in new developments, less than half of which are pre-released, with some projects not being preleased. According to submarkets, availability ranges from 10.3% in NoMa and 13.1% in Southwest – the only two submarkets with availability rates below 20% – to 26.9% in Capitol Riverfront:

Leasing activity decreased by 37% to 2.0 msf compared to 2019. The state accounted for more than half of the leasing volume in terms of square meters. Renewals accounted for 57% of the leasing volume.

Asking rents have barely dropped to USD 58.45 psf for Class A and a total of USD 55.31 psf, but according to Savills, “record concessions have already skyrocketed”:

“Concession packages for new, long-term Class A leases averaged 147.00 psf in tenant improvement allowances and 23 months of free rent for a total of $ 270.00 psf – an increase of 30.9% since the pandemic began. The free rent has risen most aggressively since March 2020, rising by an average of seven months with a transaction period of ten years or more. “

Seattle / Puget Sound.

Overall availability increased to 19.4%, from 9.0% in the Everett Central Business District to 29.8% in Southend.

The letting volume of 1.1 msf in the second quarter was 60% below that of the second quarter of 2019. The asking rents have been roughly the same since 2019. But Savills says, “Tenants should generally expect owners faced with significant availabilities in their portfolios to find generous concessions and flexibility in rental terms.”

Manhattan, the largest office market in the USA.

Availability increased to 18.4% overall and for class A buildings to 17.9%. By submarket, availability ranged from 12.3% in Hudson Yards to 25.8% in Soho.

Letting activity fell by 50.5% compared to the second quarter of 2019 and by 54.6% compared to the second quarter of 2018 at 4.9 msf. The asking rents have fallen slightly. The total asking rent of USD 75.60 psf decreased 3.5% compared to Q2 2019 and the class A asking rent of USD 86.05 psf decreased 5.3%. According to Savills, “the concessions continue to increase with the current value of free rent and tenant improvement allowances” for long-term Class A leases by 17% from early 2020. “

Have fun reading WOLF STREET and would you like to support it? Using ad blockers – I totally understand why – but want to support the site? You can donate. I appreciate it very much. Click on the beer and iced tea mug to learn how:

Would you like to be notified by email when WOLF STREET publishes a new article? Login here.

Great information on installing a metal roof on an existing building.

Product information is available from Classic Metal Roofing Systems, the manufacturer of beautiful metal roofs.

Metal roofs.

Source link


About Author

Leave A Reply