A slow rebound for this embattled asset class
Much has been made of the death of downtown office, but don't expect investors and tenants to write the eulogy just yet. Office saw an amazing collapse after the rise in Covid, but like many things, it seemed to accelerate what was already occurring. In fact, office had seen declining activity since the end of '18/early '19 as major markets lost employees due to rising living costs and long commutes. We're not going to sugar-coat it, office is still in a difficult place but there are glimpses that the worst may be behind us and that could mean opportunities for investors.
According to a recent report from Colliers, office space has broken the wrong kinds of records, posting huge negative absorption and large amounts of sublease space. Subleasing space in the past has been a barometer for the economy, in that if companies need to downsize due to economic contractions, they typically will put sublease space on the market. Yet the economy is roaring and consumer sentiment remains high, so the reason this time reflects the strong undercurrent of the work-from-home flexibility many companies are offering. In fact, companies like Salesforce, Google, Microsoft, Facebook and many more have extended their WFH timelines or simply installed new mandates allowing WIYS (working in your slippers) indefinitely.
This is reflected in the Kastle Barometer above showing that only slightly more than a third of office workers are heading back to their desks. With variants compounding issues and poor commuting weather upcoming, it's not difficult to think that the office rebound may hibernate for the winter and reemerge in the spring.
Not surprisingly investors are turning away from the asset class and have been lured to larger returns in the industrial and multifamily assets. Even hotels made a larger net positive increase in overall returns as consumers decided to travel again.
But we said, don't write off office just yet. Metro areas with good technology infrastructure, affordable cost of living and amenities are seeing rises in overall activity. Here are a few headlines:
Which brings us to Portland...
Downtown Portland still suffers from the pandemic, social unrest, and bad publicity overall with anti-business sentiment and homelessness. Like the rest of the nation, Portland saw absorption go negative and vacancy rates hit all time highs on both direct and sublease space. Yet despite this, overall asking rates haven't moved much at all. In fact, certain areas of the CBD such as the Lloyd District and suburban areas actually posted rental increases from last quarter.
Some notable leasing has occurred in the suburban areas, such as Hillsboro, but overall things have been relatively quiet with limited transactions. The real improvement lies in the fact that vacancy rates are plateauing and we may have seen the worst in the Portland MSA.
The prediction is that workers will slowly trickle back into office, but not at the pace originally anticipated. We expect a muted response to getting vacancy rates back down as Portland attempts to get its footing in the CBD areas. It could take a while (2-3 years) before we get back to the historical 10-11% vacancy rates.
About the author:
Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty Advisors specializing in portfolio and asset management for high net worth clients and institutions. 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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