Office Is the Most Controversial Asset Class Today

The office market has become the most controversial asset class in commercial real estate, according to Spencer Levy, chairman of Americas research and senior economic advisor for CBRE, who recently spoke at a CREW San Diego virtual event. While hotel and retail properties have certainly been hit the hardest by the pandemic, there is significant uncertainty about the future of office demand. In the meantime, the sector is benefitting from high rent collection—above 90%—which has stabilized the sector in the near term.

According to Levy, the office market has bifurcated during the market dislocation. Multi-tenant properties with short lease terms aren’t doing well, but properties with larger, corporate tenants are trading hands. The same is true in the retail space. Multi-tenant properties are struggling, in terms of both rent collections and investment demand. However, properties with essential retailer occupancy, like grocery stores, are performing better.

The office dislocation is also market driven. CBD areas and dense urban markets have faced bigger drops in occupancy and rents than counterparts in the suburbs and smaller metros. “CBD markets will take longer to come back than drive-to markets with low density,” says Levy. The window of opportunity is longer in big cities than secondary, drive-to markets.” As a result, Levy recommends that office tenants in smaller metros and secondary markets negotiate renewals earlier than in major metros. “Negotiate your deal sooner in Carlsbad than L.A.,” he says.

In the long-term, he also says that remote work won’t be a widespread trend. “No one in the industry has studied work from home issue more than me,” he says, adding that he has examined trends around working from home for 20 years. “Most office use is a need not a want.” He believes that people will return to the office simply because they want to. “You don’t need to but you want to,” he says, adding that remote work doesn’t support productivity. Even if given the option, most workers, he believes, will go back to work in the office.

This doesn’t mean there won’t be significant changes for office. Levy is expecting a hub-and-spoke office model to emerge and there will be more agile spaces and flex spaces in the future as well. “Occupiers want less permanent long-term space,” he says, adding that he doesn’t know if that means a 10% reduction or a 30% reduction in space. “We don’t know, but it will be less than we think.”