The Office Market Is in Turmoil. So Why Are Rents More Expensive?
U.S. office markets are suffering from soaring vacancy rates, a record amount of available sublease space, and rising defaults. But curiously, office rents are holding steady or even climbing.
Average U.S. asking office rents are $35.24 a square foot, compared with $34.92 in the fourth quarter of 2019, according to data firm CoStar Group.
Higher asking prices are a reflection of the seemingly oddball way the commercial real-estate market works. Rents are a critical metric used by lenders and others to determine the value of a property. Owners will do everything they can to avoid cutting them, even if it means keeping space vacant because the rental prices deter prospective tenants.
Landlords who cut rents significantly to fill empty space “would significantly reduce the appraised values of their buildings,” said David Bitner, the head of global research for Newmark Group, a commercial real estate services firm. “This in turn could lead to a covenant default on their loans or at minimum would make it harder for them to refinance.”