Mike Brehm was touring downtown Minneapolis office space with a prospective tenant in early March when he began to realize the pandemic’s potential magnitude.

“At first, the client and I weren’t able to shake hands, but as we toured about five buildings, I started noticing how many times I touched something like a handrail, an elevator button, a bathroom door or another point of contact,” said Brehm, a partner at Minneapolis brokerage Kenwood Commercial. “That’s when I saw the magnitude of what was to come.”

Brehm is one of tens of thousands of commercial office brokers across the country scrambling to adjust to a market upheaval as a result of the coronavirus.

As the pandemic has temporarily shut the economy, brokers throughout the United States have watched markets plummet from record-setting peaks to near standstills. Joining millions of Americans now working from home, many are resetting their expectations for the year as they are gradually able to measure the full impact of the virus on their regions.

“Going into this year we were expecting more of the same, if not greater demand, because existing tenants were expanding,” James Nelson, Avison Young’s head of tri-state investment sales in New York City, said of companies such as Facebook, Amazon, Apple and Google. “Unfortunately, none of that took effect because of the current pandemic, and now it’s a question of how quickly we’ll be able to make it through this.”

Prior to the virus’ outbreak earlier this year, the national office market was riding a record economic expansion that had been fueling new development, leasing activity and sales volume. National average rents have steadily climbed over the past six years to their record high of $30 per square foot at the beginning of 2020. The average vacancy plummeted to a low of 9.4% in late 2018, only to tick upward once new construction — built to accommodate rising demand — began to add more supply to the market.

As the pandemic tightens its grasp on office markets across the United States, demand for space is on track to post its first negative quarter since the last economic downturn in 2010. According to CoStar data, new leasing activity is expected to come to a near halt for the remainder of the second quarter, and transaction volume is expected to plummet as investors and lenders grapple with an uncertain economic future.

The nation’s average vacancy rate is currently 10%, a figure CoStar expects will steadily climb through mid-2023.

Office markets such as New York City, Minneapolis, Denver and San Francisco and Austin, Texas, are expected to absorb the pandemic’s impact differently. But despite the uncertainty, brokers and real estate professionals in the five cities said they remain optimistic the strong fundamentals leading into the pandemic could make it easier to recover once business in their respective markets is back up and running.

‘Scrambling to Prepare’

In the week after that March 11 tour in downtown Minneapolis, Kenwood Commercial’s Brehm and the rest of the city’s commercial real estate industry went from hosting face-to-face tours to setting up their Zoom accounts at home.

“For the first couple of days it was about scrambling to prepare yourself as best as possible,” Brehm said of juggling calls among clients in the tech, finance, wealth management, advertising and other sectors of Minneapolis’ diverse tenant base.

Prior to the outbreak, Minneapolis and the greater Twin Cities area was heading into a stable, if not slow, year ahead. Though it’s anchored by a high concentration of Fortune 500 companies such as 3M and Target, the region was hit with slow leasing activity that was expected to trigger possible rent and tenant losses.

Similar to other mid-tier cities across the country, Minneapolis’ stability could be its leading attribute for whatever downturn will ensue as a result of the pandemic. According to CoStar data, Minneapolis’ steady approach to building new office space has resulted in the region’s 3.4 million square feet of space currently under construction. Even with the impending burst of new space, Brehm said he’s expecting the temporary halt in business will unleash some pent-up activity.

“I think it will be pretty busy once the order is let go,” the broker said. “We’ll see that for a few months until it stabilizes, but the office market as a whole will be impacted.”

While softening rental rates and higher vacancy rates are expected for the rest of 2020, Brehm said he thinks the pandemic could have a long-term effect on how Minneapolis’ tenants think about their space.

With most companies able to shift to a work-from-home structure, executives might reconsider how much space they need, how to make their office more efficient and whether a building has amenities that prioritize hygiene and wellness.

“There will be some great things that come out of this,” Brehm said. “It will provide opportunities on the tenant side to restructure what their overall office footprint looks like. Maybe that means reducing their square footage or moving into a building with automatic bathroom doors. No one knows what exactly it will be, but we know the change is coming.”

‘The Same Boat’

Denver office broker Steve Billigmeier isn’t thinking about leasing new space right now. Rather, he’s focused on helping tenants stay in their existing space.

“Every situation is unique right now, and everyone’s business is impacted differently, but across the board, everyone is impacted one way or another,” the Cushman & Wakefield executive managing director said. “My day now is a lot of damage mitigation for clients, deferred rent, restructuring deals we had at the finish line before all this … That’s the storyline for tenants right now. We’re taking it case by case, but really, everyone is in the same boat.”

Once heavily dependent upon oil and gas companies, Denver’s office market in recent years has attracted a new class of startups, tech companies and professional services firms that have fueled leasing activity and new construction.

As the region continues to shift away from its previous dependence on the oil and gas industry, Denver’s robust workforce, quality of life and low business costs has made it a magnet for companies looking to relocate from higher-priced markets such as San Francisco. At the start of the year, Billigmeier said there were more office development proposals than in the past 20 years combined.

“There were tons of new projects in the pipeline, and while some have broken ground, a lot are on pause right now,” the broker said of investors and developers waiting to see if companies will continue to expand in the city once it begins to recover.

While tech has fueled a lot of recent activity throughout the city, downtown Denver is particularly vulnerable to any economic turbulence because of its large concentration of longtime oil and gas tenants. Billigmeier said about 15% of the downtown area is occupied by industry tenants, all of which are dealing with dramatic swings in the oil market as well as the global pandemic.

“There will be a decent amount of inventory online in Denver, and that will provide more opportunities for other industries,” he said of how the market will recover in the months to follow. “More inventory at great pricing could attract tenants looking at expanding their portfolio. As for deal activity? Who the hell knows.”

‘Office Was White Hot’

Nelson, Avison Young’s New York broker, started the year expecting more of the same: strong pricing, strong demand and more major leases among large corporate tenants in the nation’s biggest office market.

Already leading the nation with its robust inventory and the amount of new space completed over the past 12 months, New York was preparing to expand even further with a record-setting amount of new office construction.

Now, working from home at the epicenter of the pandemic with his wife homeschooling their children in the next room, the rest of the year won’t be anything near what he initially expected.

“We were seeing an upward trajectory continuing throughout the year, but now, it’s just a matter of hanging in there,” Young said. “Yes, everyone is hunkered down now and staying put for the time being, but will companies bring back the same workforce as before?”

Already, the city’s stay-at-home order issued March 22 is dragging down leasing activity, demand and rental growth, according to CoStar data. The nation’s largest office market has been driven by a demand for new office space since the Great Recession, resulting in 23 million square feet of new space currently under construction throughout the city.

The broker, who said he knew as soon as his midtown office shut down that this pandemic could potentially keep him home for months, now pulls 12-hour days to keep active deals on the table and to help buyers understand what he calls “the new normal.”

“Three-fourths of investors are still out there and looking, but it has to be for a considerable discount,” he said. “It’s challenging now, but we’re all just trying to figure this out as we go along. For sellers that means giving flexibility in terms of price and maybe time to close, and for buyers that might be figuring out alternative financing as more and more lenders pull back.”

With the city’s commercial real estate market at a near halt, it will take some time before the region can recover from the enormous amount of loss it has suffered over the past several weeks and begin its return to normalcy. Once it can get started, Nelson said he is expecting the city will be able to rebuild some of its earlier momentum.

“I could see pricing go down and leases becoming more flexible,” Nelson said. “I’m not saying there won’t be an impact, but the office market should be able to weather the storm.”

‘Strongest Position It Ever Was’

Cushman & Wakefield’s Robert Sammons has always been a numbers guy, and now, he’s a glass-half-full guy as well.

The regional director for the San Francisco Bay Area had been watching as the pre-pandemic market’s vacancy rate plummeted, new construction was absorbed nearly as fast as it was proposed and an increasing number of tenants were unable to continue to grow in the tech-dominated region.

With a long roster of tech tenants eager to lease up any available space, San Francisco’s roughly 6% vacancy rate last year was one of the lowest in the nation. Some tenants preleased space even before a proposed development secured the necessary approvals. Customer management software Salesforce in late 2018 agreed to take 325,000 square feet of space at 550 Howard St., a project that as proposed will be the fourth-tallest office tower in the city. Social media firm Pinterest last year signed a deal to anchor one of two nearly half-million-square-foot buildings at 88 Bluxome St. that were not even approved to start construction until a couple of months later.

“The economy was in the strongest position it ever was, and with the very tight market with very little construction and very little coming online for a while, it was getting hard for tenants to find the space they needed,” Sammons said, adding that with the current pandemic, there could be a silver lining. “There’s an upside in that we have strong fundamentals going into it. Yes, sublease availability has ticked up dramatically this past quarter, but coming out of this, the space will be attractive for tenants that are still expanding and need it.”

With most of the 7.4 million square feet of new space under construction already preleased to tech giants including Uber and Facebook, demand for space in the San Francisco Bay Area has stayed at record-high levels over the past several years. Leasing activity throughout the recent economic expansion spanned more than 2.5 million square feet last year, according to CoStar data, and many small and midsize tenants have been unable to find the space their growing companies require.

“Initially, it was a few large blocks from tenants moving about that had put space on the market, but now more subleases from professional services, startups and a few others mean more options,” Sammons said. “They may be tenants who are expanding or need space, but coming out of this situation, they’ll have it available to them. If a tenant wanted to expand in the past, that would have been very difficult and very expensive.”

Hunkered down at his San Francisco apartment, Sammons said he expects it to be several months before anyone can get an accurate grasp at how the region is able to begin its rebound. Over the past few weeks, he said leasing has definitely slowed and it has been challenging for incoming tenants to secure all their necessary permits, but for the most part, San Francisco is in a position to use the current downturn to its advantage.

“We were such a tight market and essentially pushing tenants to look elsewhere because of the costs of doing business here and because there was no available blocks of space,” he said. “This will provide an opportunity for tenants that had no choices. It’s a situation where you can look at the glass half full rather than half empty. You won’t want this to happen in any scenario whatsoever, but there may be a glimmer of hope for some tenants that want to stay in San Francisco.”

‘Needed a Reset’

Jason Steinberg is pretty familiar with economic downturns. In fact, he started his boutique Austin, Texas-based commercial real estate firm at the height of the Great Recession.

Steinberg, a partner at ECR, said he’s choosing to look at the current pandemic as another new opportunity. With the city’s rising rent growth and plummeting vacancy rates, tenants were finding it increasingly challenging to find the space they needed to stay in the city.

“Austin needed a reset,” he said. “It was doing more harm than good in some ways.”

Corporate tenants such as Facebook, Apple and Google have driven Austin’s construction rate to record-breaking levels. According to CoStar data, more than 7.5 million square feet of space is currently underway throughout the Texas city, which has the nation’s second-highest number of new office buildings currently under construction.

For other cities faced with an impending burst of new development — Boston, Dallas and Seattle among them — Steinberg said projects that will be completed over the next six to 12 months will probably face some pressure to lower rates or offer some attractive concessions in order to avoid a glut of vacant space. But all told, the city is well positioned thanks to the recent migration of companies from other states, including California.

“If things get back to where it was before, places like Austin will benefit more than most other places in the market,” the broker said. “We’re tax friendly, there’s no income tax and we have a lower cost of living. I can see most of Texas really benefiting from this pandemic.”

Steinberg admits there will be plenty of uncertainty in the months ahead, and it will take time to get leasing activity back to where it was. The broker said if the pandemic begins to improve within the next 30 to 40 days, Austin will be able to rebound pretty quickly. If that month turns into two, three or even four, however, “I don’t see how the office market wouldn’t struggle.”

“I’m just trying to keep as positive an outlook as I can, but it’s a grind” Steinberg said, adding that for him, he’s focused all of his time now on client relations. “This is an opportunity for us to come out of this better than before. We’re working harder, and there will be more deals.”