Coronavirus Leaving Deep, Lasting Changes for US Office Market

For those who are in the office sector, one of the global leading real estate companies has two words to embrace if they want to adapt and succeed: flexibility and choice.

Colliers International recently concluded in its latest report analyzing the current state of the U.S. office market. It stated a key factor determining performance in the office sector’s future would be when and on what scale the U.S. economy recovers.

One of the leading causes for concern is net absorption, which in the second quarter fell into negative territory for the first time in a decade. But there is some good news: the vacancy rate posted its largest quarterly increase around the same timeframe.

Now, to embrace flexibility and choice, the office sector is likely to encounter companies choosing a combination of a downtown headquarters, coupled with suburban hubs, flex space and remote working.

Colliers made this prediction based on the reality of the changing and uncertain crisis the coronavirus pandemic has had on the office sector. Annualized GDP contracted by 5% in the first quarter, while the preliminary Q2 2020 annualized rate shows a nearly 33% decline.

“The longer the pandemic lingers, the greater the likelihood that many of the required behavioral changes that were perceived to be temporary, such as social distancing, online meetings and working from home, will become more entrenched into the culture of the office,” the global real estate company said in its latest report.

In turn, firms are more likely to implement longer-lasting changes in their portfolios, which will add variations in performance from one market to another. But the ultimate impact on office sector metrics will take several quarters to fully emerge and for firms to assess their space needs.

In the report, Colliers, using history as a precedent, pointed to the cumulative 92.4 million square feet of negative office absorption in the U.S. during the global financial crisis over a decade ago. Vacancy rates increased by nearly 4%, and 189 million square feet of new supply was added, which increased the severity of the downturn on the office market sector.

Regarding the amount of office space under construction, there was an increase in the U.S. to over 155 square feet in the second quarter of 2020, compared to the previous cycle where construction volume peaked just above 125 square feet in the second quarter of 2008.

In the report, Colliers stated the current construction cycle is “more prolonged with activity above the long-time average for 24 quarters to date,” which is an encouraging sign for the office space sector moving forward.