Delta Variant Slowing, Not Ending Office Recovery

The Delta variant of Covid-19 is slowing, but not ending the recovery of the office sector, JLL is reporting.

Acknowledging Delta has pushed back decisions and added near-term uncertainty, JLL is still expressing confidence the office market will recover and remain a critical part of the workplace, and of investment portfolios.

“A physical office reinforces culture, drives collaboration and innovation, enables professional growth and brings a company’s best to its clients and employees,” said John Gates, JLL’s Chief Executive Officer, Americas Markets.

As evidence of the strength of the office sector, JLL pointed out leasing volume increased yet again in the third quarter by 7.8% from Q2 to 39.2 million square feet.

The firm added leading indicators, such as lengthening lease terms, demonstrate some confidence in the market and tenant intentions to use office space long-term. In the third quarter, leases of at least 5 years in length accounted for nearly 70% of all activity and 43% of leases were at least 10 years in length.

The office recovery is being helped, JLL also said, by most companies embracing mobility or flexibility ahead of the pandemic. Hybrid models are typically the starting point to return to the office, ahead of local guidelines allowing for full capacity. However, JLL cautioned the initial impact of hybrid will be relatively minor with demand variations across the board depending on location, employee amenities and potential new construction.

The leading indicators of an office recovery have shown sustained upward momentum until Delta’s recent dip, according to the firm.

A JLL “comeback index” of those indicators which include which track tangible data such as office entry badge swipe rates, leasing activity, lease term, TSA checkpoints, unemployment claims and more, showed a peak of activity and office usage in July after retracting a bit in the last two months, Ben Breslau, JLL Chief Research Officer noted.

He said JLL is anticipating Delta could push another sustained wave of office recovery into the first quarter of 2022 but won’t result in a prolonged pause given the greater level of immunity through vaccinations and the momentum we see in other sectors.”

CBRE, as well, reported earlier this month that the Delta variant is easing the office market.

“We knew that the spread of COVID’s Delta variant would affect the office-market recovery, and the August index results bear that out,” said Julie Whelan, CBRE Global head of Occupier Research. “The question is whether this is a momentary pause in the recovery or something more. It is possible that federal and corporate vaccination mandates could boost COVID- containment efforts and, by extension, nudge America’s return to the office back on track.”

Meanwhile, George Smith Partners managing director Gary Mozer offers one silver lining for the CRE community: increases in transaction volume should offset much of the effects of the delta variant. Real estate transactions are speeding up because of potential changes to the tax code such as loss of 1031 tax treatment and increasing capital gains rate, he noted earlier this month.