Office leases signed in the earliest part of the pandemic, those roughly with three-year terms, will be coming up this year, which could delay space attrition, according to a new report from Marcus & Millichap.
Meanwhile, given that many office spaces could remain empty for several years, the thought of converting those assets to other product “remains a niche option,” the report said. Conversions of certain older assets into other uses will occur, it added.
Recent office leases have skewed toward smaller floorplans and shorter terms, Marcus & Millichap reported. And, despite flight-to-quality, Class A properties are still challenged.
“Class A fundamentals continue to be impaired by new supply, with the national vacancy rate for the segment eclipsing 16 percent all last year,” the report said.
Class B and C office availability held about flat last year at 12.8 percent as this tier faces less construction pressure “and may see some of the more challenged stock leave the market as part of the conversion process,” the report said.
Suburban Office Most Resilient
Leasing activity last year for older buildings was at its lowest point since 2007, according to the report, meaning the outlook for them shows the potential for improvement.
“Suburban offices continue to be the most resilient in the current environment,” said the report, “as business formation applications are being filed at nearly double the average pace, which suggests that down the line new companies will need office space, backfilling demand lost to remote/hybrid schedules and other economic hardships.”