Standing at the Crossroads
Colliers’ latest research report, Office Space in the Post-COVID Era, investigates how the recession created by the COVID-19 pandemic is anticipated to impact the U.S. office sector.
Summary of Key Findings
The recession created by the COVID-19 pandemic is anticipated to impact the U.S. office sector in three key ways:
- A sharp, but shorter-lived period of negative pressure on market fundamentals than in the Global Financial Crisis of 2008.
- A more lasting effect on location strategy coupled with a reassessment of floor layout and workflow.
- Uncertainty about the impact of remote work on space requirements.
Occupancy & Demand
- As organizations begin to return to the office, look for them to reevaluate their space and premises strategy. This could involve a thorough overhaul of all aspects of their portfolios, including the volume of space needed, where it is located and at what cost. In addition, firms will explore ways to increase the flexibility of lease terms.
- It may take several quarters, and multiple phases of reopening, before fi rms can fully assess their space needs. With the exception of a few markets like San Francisco and Houston, any sizeable flow of sublease space to the market is not likely to occur until the latter part of the year, creating a point at which a more notable uptick in vacancy may occur.
- While negative absorption was expected in the second quarter of 2020, the true test will be the second half of the year once occupiers have had time to adjust to their new work environments and more accurately assess their space needs. Expect any decline in rents to be more prevalent in older Class A and commodity space.
- Ultimately, office space demand will be determined by the shape and timing of the economic recovery. We anticipate a “swoosh” shaped rebound, which picks up steam in Q4 2020 and Q1 2021. However, since real estate lags the economy, we may not see the strongest office market metrics until the end of 2021 or well into 2022.
- It is expected that firms will shift to a more diverse and employee choice-based portfolio. This could involve a combination of retaining a downtown headquarters, perhaps at a reduced footprint, coupled with suburban hubs, flex space and remote working.
- The COVID-driven work-from-home experience has shown that remote work is here to stay. Both employees and their managers see the benefits. The office will become more of a destination that will attract workers to what the office does best: gathering, knowledge transfer, on-boarding, social interaction and connection to brand, culture and mission.
What About Flex?
- Flexible workspace operators are already focusing on de-densifying their workspaces, with many reducing the capacity of certain work areas by as much as 50%.
- Enterprise interest in flexible office space could be on the rise as fi rms seek shorter-term commitments during this period of uncertainty. This presents an opportunity to attract such clients for the longer term as well.
- The ability for flex providers to offer a network of local and national alternative office solutions, and not fixed-point solutions like a traditional tenant-landlord arrangement, will create more flexibility for those seeking greater ease of access and exit offerings.
Capital Markets
- While transactional evidence is limited, any price discounts to date have been in the range of 5% to 10%. Should the recession prove to be short lived, we may be looking at more of a slowing in sales activity as opposed to a wholesale drop in pricing. This is particularly the case with cross-border trades while travel restrictions remain in place.
- Perhaps the greatest issue facing owners and investors is the desire for flexibility. On an overall basis, occupiers look likely to gravitate to shorter-term lease commitments, thereby creating a shorter income stream, with implications for valuations and hold periods.
- The investment market is unlikely to reach new benchmarks until there is stabilization in the occupational market. For the immediate future, it seems that there will be a bifurcated approach in investor strategy involving either core, low-risk, assets, or opportunistic purchases of discounted distressed properties. On the positive side, we anticipate a low-interest environment through the end of next year.
- Given the uncertainty of global market political and economic stability, companies are beginning to investigate opportunities to relocate operations back to North America. The workforce trend of on/near-shoring could provide benefits for office and industrial markets as those companies looking to migrate operations from the Asia Pacific and European markets become increasingly more attractive.
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