This Expert Expects a 15% Drop in Office Demand

For Green Street Director of Research Cedrik Lachance, the pandemic’s defining commercial real estate story may ultimately be the work-from-home trend.

“Choosing where one does work has meaningful impact to not just office, but to residential, hotels, and suburban shopping centers, which will all have different fundamentals based on the decisions that people make,” Lachance said in a recent blog post.

Lachance says implementing a hybrid workforce scares many companies as they try to manage workforces where some individuals want to be in the office five days a week and some individuals never want to see an office again.

Ultimately Green Street expects about a 15% drop in office demand versus pre-Covid trends. “It is not going to happen overnight, and you are going to see many disparities between markets and countries,” Lachance said. “Coastal markets in the US should suffer a bit more from work from home, whereas in markets that are more dynamic from an employment perspective, often in the south, you might not even notice that work from home is becoming a greater percentage of the pie.”

Overall, commercial real estate prices have risen 8% in 2021 July, according to Green Street’s Commercial Property Price Index. Across sectors, Lachance sees a 300-basis-point rebound in occupancy, pushing them above 90% across the industry. From a rent perspective, he sees 2019 levels returning by the end of the year.

While the story has been volatility in office through the pandemic, other sectors benefited. Lachance points to manufactured homes and industrial as the two sectors with the best combination of market rent growth and occupancy gain expectations over the next five years. He sees a substantial cash flow rebound coming in senior housing and lodging. Additionally, he says non-traditional sectors represent more than half of the value of the REIT industry. The REIT structure provides a way for investors to participate in the growth of these sectors.

“In fact, several other sectors should experience net operating income (NOI) growth in the four to five percent range for the next couple of years,” Lachance said. “This is a good era for real estate fundamentals, and we see that continuing.”