U.S. office market fundamentals continued to decline in Q2, but more slowly. This is in direct contrast to the capital markets, which are looking beyond current conditions. Vacancies hit 14.7%, a 0.5-percentage-point increase from Q1, still well below the 16.3% peak in the Great Financial Crisis (GFC). Short-term vacancy trends may lead rates upward, but overall pressure is declining.

Absorption totaled negative 18.6 million square feet in Q2 2021, less than half the rate of Q1’s record decline. Overall, 153.1 million square feet has been given back over the past five quarters. While this is well ahead of the GFC’s 92.4 million square feet, it’s important to note that one-third of office markets posted positive absorption in Q2, led by Charlotte (525,480 square feet), Nashville (382,750 square feet), and Austin (343,950 square feet). The positive absorption ties into similar trends in other asset types, with Sunbelt markets leading the charge. Capital is recognizing this. Richmond, Miami, and Palm Beach posted record first half investment sales volume.

A record 208.6 million square feet of sublease space is available across the U.S. office market, significantly higher than the prior peak of 143.3 million square feet in Q2 2009. Another 6.4 million square feet was added in Q2, but that was the third consecutive quarter of fewer sublease space additions.

With localized exceptions, the continued softening in market fundamentals has yet to appreciably reduce asking rates, which are, by and large, holding firm. But the gap between asking and effective rents has widened due to increased concessions.

Economic and business confidence continues to improve, resulting — albeit with a lag effect — in further reduced volatility in office market fundamentals. While some challenges will continue through 2021, signs of stabilization are appearing.