Economic Data Sheds Light on Lease Negotiations for Tenants
Previous recessions have shown that national office asking rents historically don’t decline until four quarters after vacancy begins to increase. This is playing out again in the current U.S. office market as overall and Class A asking rents ended Q4 2020 at all-time highs, up 5.6% and 3.8% year- over- year, respectively. National vacancy, on the other hand, ended the year 257 bps higher than Q4 2019 (273 bps for Class A product). The trend in Canada is similar, with average gross asking rents up 2.2% year- over- year while vacancy has increased by 270 bps over the same time period.
This delay means that office tenants, or occupiers, can be patient in their plans to optimize opportunities in many markets. Following the conclusion of the past two recessions — the Dot Com and Great Financial Crisis (GFC) — no U.S. markets hit their overall rent trough within a year. In fact, only a third of markets hit rent bottoms within the first three years (i.e., 12 quarters).
The length of time to overall rent trough varies by market
History is a Guide, Not a Predictor
While the timeline of rent declines varies by market, the pattern is consistent. However, the depth of the pattern can vary widely. The variance among the top 10 most volatile North American markets has historically been nine times that of the 10 least volatile markets. Strategically timing the market in more volatile locations can pay significantly higher dividends for occupiers. As an example, gateway markets—which also have higher asking rents than the national average—have historically experienced rent declines twice as sharp as those in secondary and tertiary markets. The economic recession that commenced in Q1 2020 was unparalleled in its timing and the depth of the job losses. Given that, it is likely that many markets will fall more precipitously.
The degree of the declines is even more market dependent. Some are more volatile, both during expansions and contractions.
Finding the “Sweet Spot” for Re-Entry
Occupiers wanting to take advantage of a specific market’s “Sweet Spot”— the time period when 75%+ of the peak-to-trough decline has occurred— may need to move more quickly this time around than during the previous two recessions. This makes planning, strategy and action vital in 2021.
Given the unprecedent size and timing of the labor market shock during COVID, Cushman & Wakefield forecasts more markets will reach the sweet spot sooner relatively to historical experience.
While not universally true, CBDs have historically experienced larger declines in rent and have taken longer to hit their rental rate trough than suburban submarkets. With 42% of CBD submarkets not hitting their respective rent bottoms in the first 10 quarters after peaking, they are twice as likely to take 11+ quarters to bottom out than suburban submarkets (42% vs. 19% of non-CBD submarkets). This patience can be well worth it as CBD rents for the 11 slowest markets to hit rent troughs decrease by an average of 402 bps more than the 11 quickest CBD markets.1
Timing and depth will vary for CBDs and suburbs. On average, CBD rents decline 375 bps more during recessions than non-CBD submarkets. CBD submarkets also take slightly longer to hit their rent trough.
Build Data into Your Re-Entry Plan
Of course, perfectly timing the market is very difficult, if not impossible. Having a data-driven approach and a market-specific, flexible strategy can help occupiers identify when and where there are opportunities. Each market is unique, and every submarket will respond to the current economic climate differently, with considerations for current supply, demand dynamics and new construction.
This requires a market-by-market and lease-by-lease approach to maximizing opportunities across an occupier’s portfolio. Cushman & Wakefield’s Tenant Representation professionals are equipped with the tools and expertise to help your organization make leasing decisions based in economic data and extensive market knowledge.
