The Future of the Office? It’s Still TBA

The national vacancy rate for office properties ended 2020 at 17.7%, according to recent data from Moody’s Analytics REIS. That’s a 90 basis point increase year-over-year and the latest dire data point for the asset class, which continues to reel from the COVID-19 pandemic and widespread WFH adoption among American companies.

Asking and effective rents were also split: asking rents lifted 0.4%, while effective rents fell 0.7%—a disparity that’s “not so surprising given the typical lags we experience for a property type like the office sector during a time of economic turbulence,” said Victor Calanog, head of CRE Economics at Moody’s Analytics, in a recent video breaking down the firm’s Office Market Update for Q4 2020.

Asking rents only began to decline in the fourth quarter, while effective rents (defined as asking rents net of concessions) began turning negative in the second quarter of 2020, Calanog said.

What does this mean for the future of the office sector/? Well, “it’s decidedly uncertain,” Calanog said.  “The data we get from our leasing partners actually suggests most leases are rolling over at the same level and/or at the same rate.” 

The big unknown, of course, is how many employees will actually return to the office once the pandemic ends. In a recent appearance on CNBC, Cushman & Wakefield CEO Brett White said he thinks 50 to 60% of workers will be home-based at least one or two days a week. The WFH and “agile workforce” groups, he says, will be “downdrafts” on office occupancy. But for some sectors, like banks and financial institutions, adapting to a more permanent WFH model poses considerable risks—and some experts look for those sectors to make a return to physical offices sooner than later. 

“A lot is very much TBA as employers and employees try to figure out the future,” Calanog said.