U.S. Office MarketFlash Lease Term Contraction in 2020 Likely More Cyclical than Structural

The average office lease term decreased by 8.4% year-over-year in 2020 to 4.3 years from 4.7. At face value, tenants appeared to negotiate shorter terms due to COVID-19-induced uncertainty about future space requirements. A closer look shows that short-term renewals made up a greater share of 2020 leasing than in previous years. That alone was enough to drop the average office lease term nationwide.

Figure 1: 2020 Y-o-Y Change in Lease Term by Type & Location

Source: CBRE Research, Q1 2021.

The average lease renewal term dropped by 10.1% year-over-year in 2020 to 3.6 years from 4.0. Across suburban markets, the drop in renewal terms was relatively consistent. However, for downtown renewals, the decrease in term differed significantly from market to market, especially in gateway markets.

Figure 2: Change in Renewal Term vs. Sublease Vacancies for Downtown Areas in Gateway Markets

Source: CBRE Research, Q1 2021.

For example, Washington, D.C.’s average downtown renewal term increased slightly, likely driven by government agencies, while tech-heavy downtown San Francisco saw renewal terms drop by one-third.

We believe the lease-term contraction is more likely cyclical than structural because of the preponderance of renewing tenants and heavy impact in markets with large increases in sublease space.

The increase in shorter-term renewals could portend increased leasing activity in coming years when these leases approach expiration in a more stable economic environment. Occupiers likely will adopt core-plus flex strategies that include long-term leases for a portion of their portfolio and flexible office space for other requirements.