Office Trepidation as Work From Home Takes Hold
Perhaps there is no bigger controversial discussion in commercial real estate right now than the perceived trends in downtown office space across the country. Ask many office brokers and they will tell you (in a cautiously optimistic tone) that work-from-home is a temporary government-induced trend that is likely to reverse once mandates are lifted. Ask corporate business owners and analysts and they may mention that WFH may become the norm as employees weigh health concerns, commute times, and live/work flexibility in the new reality. Some say there may be more demand for office as companies look to expand square footage to accommodate more space between employees, reversing a trend that has been occurring largely since the early 2000's. Yet others may say that demand may permanently decrease overall as companies learn to adapt to a WFH model and can likely cut costs by implementing a more shared office environment used for segments of the team for collaboration and project management. The bottom line is that no one truly knows how these trends will look in the long term projections, but here's some of the data we are seeing so far nationally.
Sublease space is increasing...dramatically. This follows historical patterns where companies, already deep in leasing liabilities, look to trim costs by offsetting their office space. According to JLL research, sublease space "is now larger than during the dot-com bubble and could feasibly reach 150 million square feet of availability by the end of 2020."
Large swaths of sublease space are mainly focused in the national Central Business Districts and disproportionate square footage is occurring in historically expensive markets such as New York, San Francisco, Silicon Valley, and Seattle.
Net absorption has been starkly different from 2019, posting negative values as companies use a "wait and see" approach to their needs and office development continues deliveries that were started before the pandemic.
Despite the negative news, many investors are optimistic that long-term demand will show a healthy rebound once a vaccine is produced and companies begin to return to normal operations.
Portland is not immune to the Covid effects, and similar to national trends, has shown increases in subleasing availability, some from large local employers. Adidas North America announced it was leaving approximately 80,000 SF of office, Daimler Trucks North America was looking to unload 107,000 SF of in Montgomery Park, and Wacom, a Japan-based tech company, would also sublease their 53,000 SF headquarters. Sublease space in the area has surpassed the 1 Million square foot mark and could increase as more companies grapple with what to do with vacant office space.
Despite the negative news, office rents have not taken a serious dip yet and have mostly held steady since Q1 of this year after declining slightly from 2019's high.
With supply increasing from subleases and construction deliveries, and demand decreasing from companies holding off on leases until a clearer picture is presented, it's entirely possible that we could see a significant decrease in asking rents as the pandemic drags long. Expect CBD pricing to begin a downward trend in Q4 and Q1 2021 as more supply floods the market and landlords become increasingly desperate to occupy vacant and shadow space.
The real answers will only start to emerge once mandates are lifted and companies wearily begin to reassess their office environments. One trend that may appear is increased occupancy for suburban product as companies utilize satellite offices to spread out their workforce and Millennials move to areas that are more family friendly, a trend that was already occurring pre-Covid.
Expect any significant deal volume to be muted in the next couple of quarters as pricing expectations between buyers and sellers remains disconnected.
Obviously there are a lot of obstacles for office investment in the near future. Yet, there may well be opportunities for savvy investors looking to find bargains from older suburban B & C class space that can be updated with current amenities and social distancing standards. Preparing now for future office trends may produce some great long-term returns.
About the author:
Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty specializing in commercial real estate investment portfolios for high net worth clients and institutions, focusing on market, financial and risk analysis. He is also a faculty instructor for the CCIM Institute, teaching professionals globally in the CI-102 Market Analysis Core Course.
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