As many expected, the market for office space was hit hard in 2020 but what may come as a surprise is that it wasn’t as bad as first predicted and 2021 is shaping up to be a far better year, according to some commercial real estate brokerages.
JLL reported in its fourth quarter review of 2020 that the office market for the first time since the Great Recession posted a year of negative absorption, meaning that more tenants moved out of space they were leasing than moved in.
As bad as that may sound, JLL also reported that leasing of big blocks of space kept pace with the 10-year average with five new leases of more than 100,000 square feet.
For landlords, there also was good news in JLL’s report that asking rents for newly delivered Class A office space were 3% higher year-over-year.
Among all building classes, asking rents dropped 0.6 % in the fourth quarter from the third quarter, but year-over-year, asking rents ended 2020 1.6% higher than they were at the start of the year.
That’s not to say all was rosy.
Vaccine Prompts Optimism
Overall leasing activity for 2020 was down 46% from the 10-year average of about eight million square feet, according to JLL.
Just wait awhile, because the outlook for 2021 is far better.
“Activity was definitely down but we’re still seeing activity in the market from a lot of companies that need to have employees working in the office for a number of different reasons and I think companies are understanding that there’s going to be an end to this,” said Tim Olson, San Diego market lead for JLL.
“With the vaccine being rolled out and with the inaugural behind us, I think there’s going to be a little more optimism and clarity moving forward,” Olson said. “Over the next couple of quarters, we’ll start to see the market pick up even for the smaller or mid-size companies that maybe put things on hold.”
Cushman & Wakefield, it its fourth quarter report, noted that COVID has driven San Diego County’s unemployment rate from 2.9% in 2019 to 6.6% at the end of the year, leading to rising vacancy rates for office space.
Still, Cushman & Wakefield forecast that all employment sectors will grow at a combined rate of 1.3% in 2021 and 2.8% in 2022.
Third Quarter Return to Office
Economist Alan Nevin said 2021 will be a year of recovery for the office market in San Diego County, with the size and speed of the recovery varying by location and building type and the ability to adapt to a post COVID environment.
“If you’re going anywhere between downtown and Carmel Valley, those office buildings will do just fine,” said Nevin, director of economic research for Xpera Group.
“Where the problems are going to surface are in the C and D quality projects, many of which don’t have adequate ventilation. The big modern ones are going to be able to reconfigure their ventilation so you get fresh air,” Nevin said.