U.S. Office Absorption Turns Negative for the First Time in 10 Years

In the category of not-unexpected-but-still-bad-news, Colliers issued its Q2 2020 Office Market Outlook last week reporting that U.S. office absorption turned negative for the first time in a decade. National office demand was negative 13.6 million square feet (MSF) in the second quarter causing vacancy to rise 40 bps to 11.9%. For comparison, cumulative net demand during the Global Financial Crisis was negative 92.4 million square feet and vacancy rose from 12.3% to 16%. Vacancies are forecasted to continue rising, not only due to weakened demand but also because more than 71 MSF of office space is under construction nationally.

All of this means the pendulum is swinging in favor of tenants. For many tenants whose businesses have been obliterated, the opportunity is moot. But, for the federal government, there is real potential to strike improved deals. That’s in part because rental conditions are favorable, but its also because there is less likelihood that more nimble private sector tenants will beat the government to the finish line in the competition for vacant space. Further, lessors now seem more willing to endure the federal leasing process.

The question is whether the government, particularly the U.S. General Services Administration (GSA) can take advantage. The agency largely missed the opportunities presented by the Global Financial Crisis but seems better prepared to meet the challenge now, as it is getting started earlier on renewal planning.  With almost 55 MSF of leases expiring in the next two years, it could achieve real savings. Yet, early indications are that GSA is missing out on its biggest and most immediate opportunity, which is to renegotiate current leases. That topic may inspire a future article on this blog.

In any case, these are “interesting times.”  If you would like to read Colliers’ full report, you can download it here.