Moody's Predicts Record Vacancy Rate, Steep Drop In Office Rents This Year

The world may be eagerly anticipating the coronavirus vaccine's full rollout, but for office real estate, the worst of COVID-19's effects may still be to come.

Effective office rents in the U.S. are projected to decline by 7.5% this year and may not recover to pre-pandemic levels until 2026, Moody's Analytics reports in its latest commercial real estate forecast. The vacancy rate is projected to rise to 19.4% by the end of 2020, which would surpass 2010, during the depths of the great financial crisis, as the worst year Moody's has recorded.

As economies and society at large reopen with the increased distribution of the vaccine, office rents likely will stabilize in 2022, Moody's forecasts (along with plenty of other sources). 

Average effective office rents take into account concessions made by landlords such as tenant improvement packages that are not reflected in asking rents. The figure decreased by 0.7% in 2020, Moody's found, which could be reflective of the long-term nature of most office leases. Even as broad swaths of the office working population spent months away from the workplace in 2020, average asking rents broadly held steady, according to JLL's most recent national report. 

Where the struggles caused by the pandemic are more accurately reflected are in occupancy, where the U.S. market recorded a record 80.4M SF of negative net absorption, according to JLL. As the prevalence of remote work looks to continue long-term, the decreased need for office space will mean that landlords will need to offer more concessions than ever to fill their buildings.

As leases continue to expire, the new deals that will replace them will likely be shorter in length; the average lease term for deals signed in the fourth quarter was seven years, down from the nine-year average in Q1 of 2020, JLL reports.