There’s been a lot of speculation about the impact of COVID-19 on commercial real estate. We know that most companies are requiring their employees to work from home during the pandemic, leaving millions of square feet of office space empty. But the big question is whether the virus is pushing businesses to relocate from cities to suburbs. Global real estate services firm Cushman & Wakefield tackled this question in a special report.
The firm tracks 87 office markets across the U.S. totaling 5.4 billion square feet of inventory, and according to its data, historically 30 to 40% of all new office leases nationwide occur in the six gateway cities – Los Angeles, Chicago, Washington, D.C., New York City, San Francisco, and Boston.
Through Q3 2020, the share of new office leases in these markets represented 32%, falling within the typical range, albeit at the lower end. However, the firm noted that it can’t draw any firm conclusions yet given the data represents a small sample size in an unusual year, and these cities are more sensitive to fluctuations in the global economy.
“One thing we are observing is a greater softness in gateway city rents, but that is likely a function of the heavy building that occurred in these markets leading up to the recession,” Cushman & Wakefield noted. “On average, gateway cities had 3% of total inventory under construction vs. 2.2% for non-gateway markets.”
Given the recession and the ongoing pandemic, leasing activity is down everywhere. Total leasing – i.e., new leases and renewals – totaled 46 million square feet in Q3 nationally compared to that of 96 million square feet in a normal quarter.
In a typical pre-pandemic year, CBDs have accounted for 31 to 37% of total leasing, while the suburbs have accounted for 63 to 69%. And while leasing activity is down, the data doesn’t show any significant shift in that mix year-to-date. Through September, CBDs accounted for 32.6% of total leasing and the suburbs have accounted for 67.4%.
Renewals in downtown markets were somewhat higher in Q3 2020 (33%) versus the historic norm (20%), further suggesting that during periods of heightened uncertainty, many businesses simply opt to stay put. In the second and third quarters of 2020, renewals accounted for 29% of total leasing, much higher than the historical average of 19%.
There’s growing evidence that a higher share of businesses are signing very short-term leases or simply extending leases for three to 12 months. On average, 31.5% of all renewals signed in 2020 are for fewer than 12 months compared to the norm of 18.8%, according to Cushman & Wakefield.
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