U.S. Office Demand Recovery Firmly Underway

September Demand Recovery by Market

Boston led the recovery in September, followed by Atlanta. The previously hard-hit markets of Manhattan, San Francisco and Denver all made considerable gains in demand, while Los Angeles, which had been an early leader in the recovery, has seen demand wane temporarily due to the COVID surge.

Figure 2: September Office Market Recovery Scale, Top U.S. Markets

Source: CBRE Research, September 2021.

The U.S. TIM Index fell by 1 point in September to a level of 83. Since its low point of 68 in January 2021, the U.S. TIM Index (baseline: 100) had seen six consecutive monthly gains before peaking in July.

San Francisco (108) has shown steady improvement in recent months, with the second highest TIM Index in the U.S. Manhattan (89) also had a considerable gain of 10 points in September. The number of tenants entering the Manhattan market has been strong enough to offset several of their conversions to leases, suggesting that demand is increasing.

A few markets with lower indices also saw their TIM Index levels increase in September, including Denver’s 5-point gain to 83 and Houston’s 6-point gain to 74.

Top-ranked Boston (125) and Dallas/Fort Worth (93) were largely stable, each showing a modest 1-point gain. Atlanta (91) held steady, while Los Angeles (69) was down 2 points due to the COVID surge and renewed indoor mask mandates.

Four markets saw their TIM Index fall considerably in September, including Seattle (-6 points to 80), Washington, D.C. (- 14 points to 70), Philadelphia (- 11 points to 57) and Chicago (-7 points to 55).

Figure 4: September 2021 TIM Index–Top 12 U.S. Markets

Source: CBRE Research, September 2021.

TIM Index methodology note: CBRE tracks the total square footage of requirements from active tenants in the market, with minimum requirements of 10,000 sq. ft. The TIM Index compares the total monthly TIM requirements to a pre-pandemic baseline, which is the average of TIM requirements recorded by CBRE in 2018 and 2019. The index level for the baseline is 100. In most cases, when tenant requirements are given as a range, the index uses the minimum square footage., However, Seattle records TIM using the average requirement within the tenants' size range, while Philadelphia uses the maximum square footage.

CBRE’s U.S. Leasing Activity Index improved noticeably in September, appearing to shake off any lingering concerns about the summer's COVID surge. The index climbed by 17 points in September to a level of 93, propelled by a strong month of leasing in Boston that reached a Leasing Activity Index level of 210. Excluding Boston, the U.S. Leasing Activity Index had a  6-point gain to 82 in September.

All but three Pulse markets saw improvement in their leasing indices in September. Boston’s index (210) was propelled by two large leases: Wellington Management’s 524,000-sq.-ft. renewal/expansion and Moderna’s new lease for 462,000 sq. ft. Atlanta (130) also performed well with a 28-point increase, largely from Carvana’s signing for 590,000 sq. ft. Manhattan’s Leasing Activity Index (95) gained 31 points, putting the market in third place on the ranking. Manhattan saw six leases of more than 100,000 sq. ft. each, all of which were at least five-year commitments. September marked the fourth consecutive month of improvement for Manhattan.

San Francisco (92) and Washington, D.C. (89) also improved in September, with their indices up by 12 and 9 points, respectively.  Both markets have recorded six consecutive monthly improvements.

Chicago’s index level of 76 increased by 20 points in September. Much of the gain was attributable to a 600,000-sq.-ft. lease by law firm Kirkland & Ellis. Chicago has seen steady improvement since its a low of 43 in June.

Leasing Activity Index levels for Houston (77), Denver (73) and Dallas/Fort Worth (72) also improved in September, each up by between 8 and 10 points.

Most markets experienced a significant increase in sublease absorption as occupiers took advantage of favorable pricing, particularly for those spaces with high-quality tenant installations.  Built sublease space is especially attractive as the cost of construction materials has grown by nearly 36% between April 2020 and September 2021.¹

Three of the 12 Pulse markets saw their leasing indices decline in September. Los Angeles’s index level fell to 78, putting it in sixth place after being the top-ranked market for the previous three months, due to a recent surge in COVID cases and the renewal of masking requirements. However, in a positive sign, much of LA’s recent activity has been new leases and expansions, rather than the short-term renewals that dominated earlier in the pandemic. Demand in West L.A. has remained strong.  

Seattle (67) and Philadelphia (57) both posted moderate declines of 3 and 1 points, respectively, in September. Philadelphia’s performance was uneven geographically, as Downtown saw its quarterly leasing volume double in Q3 2021 while demand fell in the suburban markets.

Figure 6: September 2021 Leasing Activity Index – Top12 U.S. Markets

Source: CBRE Research, September 2021.

Leasing Index methodology note: Leasing activity includes all new leases, expansions and renewals of 10,000 sq. ft. or more that close each month. The Leasing Activity Index uses a rolling three-month average of leasing activity. Most markets the weighted 20% for the current month, 50% for the previous month and 30% for two months prior. For New York and Boston, where more accurate leasing data is available by the end of each month, the weights are 50% for the current month, 30% for the previous month and 20% for two months prior. The monthly rolling average is compared with a pre-pandemic baseline, which is the average monthly leasing activity between 2018 and 2019. The index level for the baseline is 100.

¹ St. Louis FRED, Producer Price Index by Commodity: Special Indexes: Construction Materials (Fred.stlouisfed.org).

Building on the modest improvement in August, the decline in the U.S. Sublease Availability Index3 accelerated in September, dropping by 10 points to a level of 181. This marked the third consecutive monthly decline since the index peaked at 195 in May.

Sublease availability fell in all but two of the Pulse markets in September. Atlanta (161) and Philadelphia (180) each saw their indices fall by more than 30 points. Denver’s level fell by 21 points to 181, while San Francisco (319) and Boston (145) were down by 18 and 17 points, respectively. Seattle’s level fell by 10 points to 251.

Other markets saw more modest improvement, including Dallas/Fort Worth (151), Manhattan (190) and Houston (95), each with declines of between 1 and 5 points.

The overall decline in sublease space is the result of several factors, including a diminishing number of new additions, a growing tide of sublease withdrawals (tenants pulling previously listed subleases off the market) and increased leasing of available sublease space.

There were two exceptions to the positive trend in September: Washington, D.C. (134) and Chicago (188), both of which increased by 1 point. In Greater Washington, D.C., sublease trends vary geographically. The District has seen sublease availability fall 15% from its peak in December 2020, while Northern Virginia has begun to decrease over the past two months. On the other hand, Suburban Maryland hit its highest level of sublease availability in September.

Figure 8: September 2021 Sublease Availability Index – Top 12 U.S. Markets

Source: CBRE Research, September 2021.

Sublease Index methodology note: Sublease availability measures the total square footage of sublease space available for occupancy. The Sublease Availability Index compares monthly sublease availability totals with a pre-pandemic baseline, which is the average amount of sublease space available in 2018 and 2019. The index level for the baseline is 100.

Note: In contrast to the Leasing and TIM Indices, a higher score on the Sublease Index is considered undesirable as it reflects an increase in available sublease space.

Recovery Takes Hold

With significant improvement in both the leasing and sublease indices, it appears the recovery of the top 12 U.S. office markets has resumed after a summer slowdown. As the recent COVID surge fades and vaccination rates continue to climb, we expect that office demand will slowly improve through the end of 2021 and into 2022.