Here’s Why Two Economists Think Clarity’s On The Horizon For Troubled Office Sector

As the pandemic winds on, the big question of what will ultimately unfold for the hard-hit office sector is on everyone’s minds. But a recent analysis by Moody’s Analytics economists say clarity is on the horizon, with 2021 likely functioning as a “transition period” for the troubled asset class in many markets. 

Economists Barbara Byrne Denham and Thomas LaSalvia predict that 2021 “will be a difficult period for the office sector,” though they say a “seismic shift in the demand for square footage is unlikely.” A lag in CRE market stress is likely, they say, but will be followed by a “slow and steady return to pre-pandemic rents and vacancy rates.”

Among large cities, the roster of post-pandemic office standouts include the usual suspects of Austin, Denver, and Raleigh. Phoenix and Raleigh closed out 2020 with year-over-year reductions of a minimum of 60 basis points in office vacancy rates, according to Moody’s Analytics Reis data, the economists note in their report. The experts’ annualized average effective-rent 2021 forecast for so-called “old guard” office markets like Chicago, New York City, Los Angeles, and San Francisco clocks in at negative 8.3%.

And while they stop short of declaring “the death of density or the end of large, ‘old guard’ business centers,” Denham and LaSalvia do forecast “a divide between the emerging and old-guard cities to continue over the next couple of years before both sets of markets recover later this decade.” They also expect the percentage of workers who engage in remote work at least a day a week to “rise considerably” post-COVID, citing US Bureau of Labor Statistics and Atlanta Fed data showing that more than 40% of office workers were working remotely at least part time in 2020.

But despite this data, Denham and LaSalvia note that in June, the Atlanta Fed revisited its survey and asked employers about their predicted space needs going forward. 

“Not only did the majority of respondents not expect large reductions, but many reported the need for slight increases in space,” Denham and LaSalvia write. “Why the seeming contradiction? The simple answer is that many employers are still requiring employees to be present in the office at least part time. This requires space, and even if the sharing of desks becomes the norm, these desks are likely to be socially distanced. Additionally, it is probable that more collaborative space will be needed as office-using employers lean toward bringing in teams on the same days in the hopes of sparking creativity and innovation that may not be replicated on a virtual platform.” 

Many of those employers are also centered in the knowledge creation and business services space, sectors that tend to use more office space. Moody’s Analytics Reis predicts the professional and business services sectors will grow by more than 20% over the next decade, a forecast that will bolster office demand.