• Office Tenants Paying Rent

    Office Tenants Are Staying Away But Paying Rent During Pandemic

    Despite Some Noteworthy Deals, Companies Are Shedding Space, CoStar’s Michael Roessle Says

    While most U.S. office tenants haven’t returned to their buildings yet because of the pandemic, they are increasingly paying their rents, according to CoStar’s latest analysis.

    Even though states and cities across the country have permitted office properties to reopen amid the COVID-19 outbreak, “employees have been in no hurry to return,” Michael Roessle, CoStar’s director of U.S. office analytics, said in a new video.

    “Many major markets across the country are reporting about 10% to 15% occupancy of office space,” he said. “Without a vaccine or effective therapeutics, many employees feel they’re only as safe as the least-vigilant person they come into contact with on the train, in the office or in an elevator cab.”

    But there is good news for office landlords, in that tenants are forking over their rent, with collections stabilizing, according to Roessle. The share of rent received increased from about 93% in April and May to roughly 97% in June and July, he said, citing data from Nareit, the trade group for real estate investment trusts.

    A few noteworthy office lease deals closed in recent months, but “tenants are continuing to shed space, whether due to financial difficulty or transitioning to a more permanent remote-work structure,” according to Roessle.

    “Following the nearly 10 million square feet of negative absorption in the second quarter, the third quarter is on track to add an additional 24 million square feet of losses,” he said. “Though steep, this reversal of demand doesn’t approach the 56 million square feet shed" during the Great Recession.

    The long-term impact of the pandemic on the office sector remains unclear, according to Roessle.

    “Should every employer across the country reduce their footprint just 10%, that would translate into more than 700 million square feet of vacancy added to the market over the next decade or so,” he said. “Conversely, should employers feel that remote work erodes company culture and creativity, demand could increase either via less dense layouts or the addition of suburban offices to a [central business district] headquarters in a hub-and-spoke model.”