U.S. downtown office-vacancy rate is as high as it's been since 1994
By Ashley Fahey
Tampa Bay Business Journal
Published: Nov 3, 2021

Office vacancy is on the rise everywhere, but the rate of increase in downtown office vacancy is outpacing that of suburban office.

That's according to recent third-quarter office research from CBRE Group Inc. (NYSE: CBRE), which found the U.S. downtown office-vacancy rate hit 16.3% in Q3, the highest it's been since 1994.

Suburban office, meanwhile, is still marginally higher, at 17.1%, but the margin between the two is at its narrowest since 1998.

Ian Anderson, senior director of research and head of Americas office research at CBRE, said the dynamics are relatively complicated and still playing out, given the ongoing pandemic.

"Downtowns across the U.S. have gotten clobbered much more through the crisis," Anderson said, adding much of that is owed to fears of virus spread in more dense, transit-dependent areas. "People have been much more comfortable driving to work in suburban locations with less density, so that’s favored them more."

Does that portend a long-term trend or pattern toward more suburban offices? Not necessarily, Anderson said.

He said new office construction has been more prolific in downtown areas versus suburbs for years. Many office developments that started in a pre-pandemic environment are delivering in 2021, which is contributing to the bump in total vacancy rates.

Unsurprisingly, new office construction continued to taper off in Q3 2021. CBRE found the decrease of new construction in the suburbs dropped 26% year over year, compared to a 15% decrease in downtowns. Office construction totaled 99.4 million square feet in Q3.

Market reports vary somewhat by firm. Jones Lang Lasalle Inc. in its Q3 office report says the new-construction office pipeline shrank to a little more than 100 million square feet last quarter. Once the pipeline is less than 100 million square feet, that'll be the lowest amount underway since 2015.

The current pipeline is only 51.9% preleased, which is down from the typical 55% to 60% rate seen in previous years, JLL found. About 24.1 million square feet is expected to deliver by the end of 2021 and another 43 million square feet in 2022.

"Although this new space will be in higher demand, the induced flight to quality will exacerbate already high vacancy rates in second-generation assets," JLL wrote in the report.

Suburban office preleasing has declined each quarter since Q1 2021, with a more marked drop in Q2 and Q3, according to CBRE. Less than 40% of suburban new office construction was preleased in Q3, according to CBRE. That's compared to about 50% of new construction downtown office.

Anderson said, through Covid-19, preleasing of downtown office space has in general not declined as much as suburban counterparts.

"I think there are a lot of companies waiting on the sidelines to get back into those offices," Anderson continued.

One urban-suburban office trend that may play out — although it, too, remains to be determined — is an increase in flexible office in more suburban locations.

Big-name coworking groups, including WeWork Cos. and Industrious, have historically concentrated their leasing efforts in downtown and high-density submarkets. But with a shift to more remote work, companies and coworking groups may find it beneficial to have a foothold in more suburban areas.

"We are expecting flexible-office providers to stretch out into the suburbs more often," Anderson said.

Among the office markets tracked by CBRE in its report, Wilmington, Delaware, had the highest downtown office vacancy in Q3, at 26.4%. Chicago had the highest suburban office vacancy rate, at 26.1%.