In a recent blog article on Colliers’ Knowledge Leader site, National Director of Office Research Stephen Newbold reveals the scale of COVID-19 pandemic-driven occupancy decline in 2020. Newbold notes that the negative net absorption that has accumulated since the beginning of the health crisis has now surpassed the negative net absorption accumulated over eight quarters from 2008 to 2010, spanning the Global Financial Crisis (GFC). During the GFC, net absorption totaled negative 92.4 MSF. From 2Q 2020 through 4Q 2020, that same indicator totaled negative 94.9 MSF. Despite the growing availability of vaccines, it seems clear that there will be persistent negative demand well into 2021.
What is driving this negative demand? The primary culprit is sublease space (a topic we have reported on previously). It’s no surprise that sublease space would be responsible for initial market weakness. With most people working from home, office space remains unutilized and, after a few months of initial disorientation, many firms have concluded that they would be working from home over an extended period, or perhaps permanently (“permanently” here defined as at least through the remainder of their lease terms). Thus, the sublease.
New leasing activity, of course, is also off-pace as firms hunker down in an effort to weather the viral storm. Extensions are increasingly common where they can be had. For some tenants, it’s simply a matter of hunkering down until their prospects are clear. For others, extensions allow time to determine what the future workplace will look like before entering into long-term space commitments. The net result of all of this is a softening of markets everywhere. For tenants willing to enter into long-term leases, the world is their oyster.
And this brings us to the federal government, the nation’s largest office tenant. The weak market conditions couldn’t be better for the federal government and, specifically, the U.S. General Services Administration (GSA), which leases space on behalf of most federal agencies. There is little doubt that the federal government will be in business this year, next year and, barring some far more cataclysmic event, in 100 years. GSA also has one-quarter of its entire lease portfolio expiring in the next two years, so it is poised to transact at the same time that favorable leases are to be had.
Yet, faced with a similar scenario a decade ago, GSA missed the boat. The agency received some great deals to be sure, but it could not expedite its leasing process to fully exploit the opportunity. Now, the question is whether GSA can capitalize on the current market.