A Realistic Timeline for Office's Recovery
"People have to sit somewhere, and most do not want to sit at home all of the time."
Despite bleak forecasts from some experts, the office sector will return to pre-pandemic levels—it’ll just take time, according to analysts from Cushman & Wakefield.
The firm’s baseline scenario presented in a recent report on the asset class, has US office vacancy reaching an inflection point and beginning to improve in the second half of 2022, after which point it will “fall precipitously downward.”
Vacancy has increased significantly over the past 18 months, driven partly by the pandemic’s push to remote work and also by a glut of new office stock. About 14 million square feet of new office space was delivered in Q1, with a total of 64 million square feet expected by year’s end.
Effective rents, which were down in Q1 2021 12% year-over-year in major markets and down 5% in non-major markets, will likely rise again by the second half of next year or the first part of 2023, Cushman & Wakefield experts predict. Rents generally follow vacancy, so vacancy begins falling, rents will follow.
But there’s a caveat in the form of the usual “pandemic disclaimers”: as the country recovers from COVID, there’s a much smaller sample size of deals to draw from and an “abnormally high percentage” of short-term renewals). In addition, while starting rents are holding well, concessions are way up, with average tenant improvement allowances in some major markets rising approximately $70 per square foot pre-pandemic to $85-$90 in Q1. And there’s the issue of location: “real estate is an intensely local product,” C&W notes in the report, “and not every city, every submarket, every building will follow the same glide path.”
“Regardless of how remote working shakes out, the economy is going to continue to produce knowledge-based workers, business formation will improve, and people have to sit somewhere, and most do not want to sit at home all of the time,” the report says. Interestingly, the firm notes that data it collected in conjunction with CoreNet Global shows that companies are no more apt to consider a “remote-first workplace portfolio strategy” than they were pre-COVID.
“Unless for some reason we all decide we don’t want to sit under the same roof ever again, it is reasonable to conclude that office buildings will repopulate, it’s just a matter of time,” the report says.
Last month, Cushman’s CEO Brett White told CNBC that while bad times are immediately ahead for the office sector, job creation will likely reverse that in the near term.
“We’re very optimistic with the signs … that we’re seeing in the marketplace right now,” White told CNBC.