Office tenants looking for the “sweet spot” to re-enter a market will likely have to move more quickly than during previous recessions, according to new research from Cushman & Wakefield.
C&W economists say the sweet spot occurs when 75% or more of a market’s peak-to-trough decline has occurred. Historically, most CBDs have seen larger rent declines and have taken longer to hit their trough than suburban submarkets, and C&W predicts that 42% of CBD submarkets are twice as likely to take more than 11 quarters to bottom out than their suburban counterparts. On average, CBD rents decline 375 bps more during recessions than non-CBD submarkets, and they also take slightly longer to hit their trough.
In previous recessions, national office asking rents didn’t decline until four quarters after vacancy began to increase. Rebecca Rockey, head of Economic Analysis and Forecasting, Global Research at Cushman & Wakefield, said that trend is playing out again currently in the US, as both overall Class A asking rents ended the fourth quarter at all-time highs and national vacancy ended the year 257 bps higher than in the year prior.
Typically, rent troughs happen 14 to 15 quarters after a recession starts, but rents remain in that sweet spot for some time thereafter. But given the “unprecedented size and timing of the labor market shock” during COVID, C&W predicts more markets will reach their sweet spots sooner than usual.
So what does that mean for tenants? You’ve got time, according to Rockey. After the Dot Com bust and the Great Financial Crisis, no US markets hit their overall rent trough within a year, she said, and only a third of markets hit bottom within the first 12 quarters. And the variance among the top 10 most volatile North American markets is typically nine times that of their top 10 most volatile counterparts. That means strategically timing the market in volatile locations “can pay significantly higher dividends,” according to Rockey.
“This patience can be well worth it as CBD rents for the 11 slowest markets to hit rent troughs decrease by an average of 402 bps more than the 11 quickest CBD markets,” Rockey says in the report. “Of course, perfectly timing the market is very difficult, if not impossible. Having a data-driven approach and a market-specific, flexible strategy can help occupiers identify when and where there are opportunities.”