The big question on the minds of our clients is what the future holds for the office market. Four months into the pandemic lockdown, the first clear sign of a market advantage shift from landlord to tenant is the big jump in Philadelphia and suburban office subleases between the first and second quarters of 2020.
CoStar data shows a 12.7% quarterly increase in sublease square footage on the market. This is the first quantifiable indicator of a vacancy increase in what was—prior to March—a robust landlord market with declining vacancies and climbing rental rates. Due to a combination of employees opting to work from home and the harsh realities of an uncertain economic future, companies are putting their office spaces on the sublease market. We expect this trend to continue for the foreseeable future.
The Philadelphia and suburban direct (landlord/tenant) office market, which typically lags behind the sublease market based on fixed lease expirations, has also seen an increase of 1.6% between Q1 and Q2. This is the first vacancy increase in five quarters.
Over the next 12-18 months, we expect to see office vacancy rates increase significantly as tenant leases expire and square footage needs diminish. As vacancies increase, tenants can expect to benefit by reduced rental rates and more concessions by landlords eager to keep their buildings occupied.