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Office Tenants Are Feeling Confident Again

By Sam Tenenbaum and David Kahn CoStar Analytics October 28, 2021 | 10:06 AM

The average square foot per office lease has rebounded over the past few quarters, reversing a pandemic-era drop. While the average size of office leases across the country is still below the pre-pandemic average, the recent increase is an indicator that the office sector is starting to return to normal.

In the years leading up to the COVID pandemic, office leasing activity was relatively consistent. Tenants leased, on average, around 4,000 square feet across the nation, as small-business activity and expansion drove one of the longest economic expansions on record. Even as firms took less space and designed more efficient floor plans, the average lease size remained remarkably durable over the past 15 years.

But when the pandemic hit, uncertainty set in. Office tenants pulled back on commitments to new office space, unsure about whether they would ever go back to an office building. Sublease space rose significantly and vacancies ballooned.

When leases were signed, tenants often downsized into shorter-term leases, with an average square footage closer to 3,000 square feet, or about 25% smaller than pre-pandemic levels. This situation is not unique to the coronavirus pandemic, but the trend was remarkably quick to take hold during this downturn compared to the last one. The average lease size fell during the Great Recession, but at a much more gradual rate. It took nearly two years, from late 2007 to mid-2009, for the average lease size to bottom out during that crisis, and the recovery also took years. The slow pace was likely the result of bankruptcies and economic malaise following one of the steepest recessions in U.S. history.

In comparison, it took only three quarters for the average lease size to bottom out during the pandemic, and the trend has already started to sharply reverse course.

Not only is overall office leasing volume rebounding, but the average size of office leases has increased over the past few months. In fact, the average office lease of around 3,500 square feet nationally in third-quarter 2021 represented the highest mark since the first quarter of 2020.

With the scope of the pandemic, the transmissibility of the virus and 20 months of remote work, corporate decision-makers are beginning to feel more comfortable with committing to space across the country. Firms choosing to downsize or move to flexible or remote-work setups are typically doing so of their own volition rather than out of necessity. As fears of the virus abate, companies are well positioned to take on more square footage.

Additionally, a key difference now compared to previous office downturns is that most office users are in strong financial shape, as the overall economy has bounced back quickly from the effects of the pandemic. In particular, office-using employment has been a leader in the jobs recovery, and more office jobs typically leads to firms seeking more office space.

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