After a major drop in the prior six months, U.S. office absorption fell even more heavily in Q4 2020 as the resurgence of the COVID-19 pandemic and subdued market activity placed an even greater toll on the sector than in the preceding two quarters.
National office absorption in the fourth quarter totaled negative 40.9 million square feet. This is the second-lowest total on record.
Over the past nine months, negative absorption stands at a cumulative 92.9 million square feet, just surpassing the 92.4 million square feet seen during the Global Financial Crisis (GFC), which spanned eight quarters. While the scale of quarterly occupancy losses may lessen, there is the prospect of further negative absorption for at least the first half of 2021.
Ten metro office markets posted negative absorption of over one million square feet in the fourth quarter, led by New York at negative 14.7 million square feet, of which 10.6 million square feet took place in Manhattan. Other metros with significant losses included Los Angeles (3.6 million square feet), the San Francisco Bay Area (2.5 million square feet) and Chicago (2.3 million square feet.)
This decline in occupancy, coupled with the flow of sublease space to the market, continues to drive up vacancy rates. The U.S. office vacancy rate now stands at 13.2%, an increase of 60 basis points in the fourth quarter and 190 basis points over the past year. While this is still below the record peak of 16.3% seen at the height of the GFC, short to mid-term trends are likely to place further upward pressure on vacancy levels.
Sublease space remains a key contributor to the increase in vacancy. There is now a record 188.2 million square feet of sublease space available across the U.S. office market, significantly higher than the prior peak of 143.3 million square feet seen in Q2 2009. Additions of sublease space totaled 21.2 million square feet in Q4 2020, bringing the increase over the past 12 months to 55%.
While there are localized variations, this softening in market fundamentals has yet to result in any appreciable reduction in asking rates, which are, by and large, holding firm. However, in the face of limited leasing activity, the gap between asking and effective rents looks to be widening due to an increase in the concessions on offer.
Looking forward, the availability of two vaccines, with more set to follow, provides reason for measured optimism once the U.S. achieves herd immunity and there is greater confidence in returning to the office. Once this is in place, economic and business confidence should improve, resulting, albeit with a lag effect, in reduced volatility in office market fundamentals. The sector looks set to remain challenged through 2021, but we could see signs of stabilization as we move into 2022.