COVID-19 Will Cast A Long Shadow on the Office Sector

The commercial office space sector is in for a long, bumpy ride thanks to COVID-19.

Demand for office space will remain low through the remainder of 2020 and likely well beyond that due to health concerns from the coronavirus and the rapid rise in remote work—a trend that was already on the rise but accelerated by the virus. That’s according to a new report from TD Economics that looks at how the pandemic is likely to transform the office space industry in the long term. The report predicts a surge in vacancies—made worse by new office space coming online—that in turn puts negative pressure on rents.

“Now the market must contend with a sharp drop in demand in light of the COVID-19 wrecking ball,” reads the report.

The single biggest factor in what the researchers predict will be slow growth in demand for office space is the newfound acceptance of remote work. A growing percentage of office workers were already occasionally working from home before the pandemic, but a recent MIT survey of information, financial activities and professional and business services companies found that more than 80% of their workforces are working remotely. Those numbers offer evidence that many jobs can be performed remotely. Additionally, many corporations have spent money to enable their workers to do their jobs from home, and those sunk costs may sway them to make remote work a long-term solution. Companies won’t necessarily adopt permanent fully remote work policies, however.

“Some offices may instead move to flex work settings where employees may only telework half the time,” the report reads. “Such work arrangements seem appealing over the near-term, as tenants remain locked into existing lease terms and reducing office density will be a top priority for employers as stay-at-home orders are further relaxed.”

Certain jobs are more likely to require working out of an office, the report notes, such as positions involving sensitive customer data, IT, or client-facing functions, the report notes. And some aspect of the pandemic may help offset the negative impact of the COVID-19 on the officer sector. For instance, companies may need more space in which to socially distance their workers.

“The office of tomorrow is likely to feature more elbow room between desks, increased containment between teams and potentially more common areas to reduce employee contact points,” reads the report. “This trend is likely to be aided by a leaser’s improved bargaining power during and after the pandemic.”

And demand for office space in more suburban areas could increase as workers and companies seek to avoid harder-hit and higher density urban areas.