Economists' Outlook

Housing stats and analysis from NAR's research experts.

Commercial Weekly: Office Market Ends on Strong Note in 2021 Q4; Investors Still Likely to Stay on the Sidelines in Primary Markets

Amid sustained job growth and the continuing re-entry of workers to the office, the demand for office space ended with a strong finish in the second half of 2021, mainly driven by office space absorption in secondary markets. Looking ahead to 2022, office demand is likely to pick up in the second half as workers continue to head back to the office. However, flat rent growth in primary markets outpaced by high inflation and higher cost of borrowing means investors are more likely to step away from these markets in 2022.

Secondary markets drive office demand in second half of 2021

Net office absorption during 2021 Q4 was 14.5 million square feet, a strong follow-up to the 2021 Q3 absorption of 5.6 million square feet (MSF). However, given the massive amount of space given up during 2020 Q2 through 2021 Q2, office occupancy is still down by 117.8 million square feet as of 2021 Q4.

Based on CoStar market data, secondary markets drove the absorption of office space in the second half of 2021, led by Atlanta (3.3 MSF), Austin (2 MSF), San Jose (2 MSF), Dallas-Fort Worth (1.9 MSF), Houston (1.3 MSF), Seattle (1.3 MSF), Palm Beach (1.1 MSF), and Nashville (1 MSF). Philadelphia also absorbed 1.2 MSF of office space.

Boston, considered a major commercial market,1 absorbed 1.5 MSF of office space. However, Los Angeles, also a major commercial market, had a small positive net absorption (0.1 MSF). In contrast, the other major commercial markets lost office space occupancy: Chicago (-1.3 MSF), New York (-0.07 MSF), and Washington, D.C. (-0.88 MSF).

Meanwhile, the major tech metro areas absorbed office space as workers started to return to work: San Jose (2 MSF), Seattle (1.3 MSF), and San Francisco (0.65 MSF).

Notwithstanding the recovery in the second half, 117. 8 MSF of office space remains unused, with at least 10 MSF of office space released to the market since 2020 Q2 across the six major commercial markets: New York (-29 MSF), Los Angeles (-10.5 MSF), Washington, D.C. (-10.2 MSF), San Francisco (-9 MSF), Chicago (-8.2 MSF), and Boston (-5 MSF).

Workers are heading back to the office, but WFH numbers are still elevated

The demand for office space is driven both by employment creation and what fraction of those workers use office space. Low mortgage rates and increasing vaccination rates have led to a near normalization of business activity and therefore a demand for commercial real estate space, including office space. Gross domestic product in the fourth quarter measured at an annualized rate is now 3% above the pre-pandemic level and the GDP, with the GDP growing at an annualized rate of 2.3%. According to the latest December employment report, 19 million nonfarm payroll jobs have been created since May 2020, with just 3.8 million lost jobs to recover, and labor supply has become extremely tight, with more job openings (10.5 million) compared to the number of job seekers (6.5 million) as of December.

The number of workers working from home continues to trend downwards, to just about 11% of the total employment, according to NAR's analysis of the Bureau of Labor Statistics COVID supplement data. This amounts to 17.4 million workers who worked from home for some part of the week in December 2021, which is down from the peak in April 2020, when nearly 50 million workers worked from home, but is still about twice the 9 million people who worked from home (full-time) prior to the pandemic. Among office-intensive jobs (management, professional, and office administrative support), 19% are still working from home, totaling 15.4 million, about four times the pre-pandemic level.

Flat rent growth, high inflation likely to keep investors on the sidelines in major markets in 2022

The office market will continue to see significant headwinds in 2022 arising from the impact of inflation on investor office acquisitions and the effect of the omicron variant on office re-entry.

The high inflation rate is likely to have an impact on office acquisitions in metro areas that are suffering large office vacancy rates, which are mainly the major office markets. With inflation currently hovering at 7%, with construction costs up 15%, and with a tight labor market with wage growth hovering at 4.5%, investors are facing negative real returns. Rents are not likely to rise on pace with inflation in the primary major markets of New York, Chicago, Washington, D.C., Los Angeles, and San Francisco given the large vacancy rate in these markets. So, expect investors to remain on the sidelines in these markets.

With Omicron variant cases raging, the acceleration in re-entry is most likely to occur in the second half, given the announcements of big tech companies to push back re-entry plans.2 According to a CBRE occupier survey, 62% of U.S. employers that participated in the U.S. survey reported they are likely to adopt a hybrid work model.3 The hybrid work model will involve a reconfiguration of office space from dedicated spaces (for workers working at the office for most days ) to hot-desking (for workers mainly working from home but popping into the office once in a while).

1 Prior to the pandemic, commercial analysts considered as the major commercial markets New York, Chicago, Boston, Washington, D.C., San Francisco, and Los Angeles.

2 Google, Apple, Uber, Lyft, according to CityLab. See