The office market looks a lot different than it did prior to the COVID-19 pandemic, between more employees working from home and staff layoffs. The industry could be in for another big change however as the U.S. office market could lose 145 million square feet of space during the next two years, according to a new Cushman & Wakefield report. The real estate firm’s baseline scenario has a 50% probability.
The loss of 1.7 million office jobs is a primary reason why the industry is expected to shed so much space, according to Cushman & Wakefield’s report, Global Office Impact Study & Recovery Timing. The drop in office space demand is about 20% worse than what happened during the Great Financial Crisis (GFC) period of 2008 and 2009. Currently, it’s the co-working spaces returning to the market that are driving a lot of the existing office space demand.
Office space vacancy outlook
U.S. office vacancy is expected to increase steadily from where it was in the fourth quarter of 2019 (13%) and peak at about 17.6% by the middle of 2022. The increase will be highest it has been since the Dot-Com Recession in 2003. Meanwhile, asking rents could drop by 9.3%, which is more than the 8.6% decline during the GFC, but less than the 17.8% drop after the 2001 recession.
The report suggests that commercial real estate owners might look for creative solutions to combat the office space vacancy. Some of these solutions include offering free rent and increased tenant improvement concessions. These ideas might only be a temporary fix however as aggregate annual asking rents are still expected to drop by 6.5% in 2021 and another 2.3% in 2022 as the market adjusts towards its equilibrium clearing price.
“Asking rent declines usually lag deterioration in broader fundamentals, and we expect to see rents continuing to grow in 2020 despite weakening occupancy levels,” the report said. “As the U.S. economy returns to its pre-crisis GDP level (2022 Q2 in the baseline scenario), and as office-using employment surpasses its pre-COVID-19 peak a quarter later, the office sector will begin absorbing office space again and the demand metrics will begin to improve.”
Meanwhile, under Cushman & Wakefield’s baseline scenario, office demand is projected to be 15.8% lower between 2022 and 2030 due increased work from home policies—even if building density was back at pre-COVID-19 levels. De-densification measures were not factored into this projection, however. So if companies expanded their per worker footprint by 25% because of health safety requirements, office space demand would only drop by 8.2% Expanding per worker footprints by 50% permanently would completely offset the work from home effect.
COVID-19 is not the only reason for the office space shed
Office space absorption rates were going down even before the pandemic hit, according to Cushman & Wakefield. Businesses have started to use less space per office-using employee pre-COVID. Now, the combination of densification and increased remote working is expected to bring office space absorption rates down further during the next decade than previously expected.
“In this scenario, we assume that structural trend of densification comes to a halt,” the report said. “However, a new structural trend emerges in the form of increased remote working, which has a similarly negative effect on absorption rates. More remote workers lead to less demand for office space per employee. The net effect of the halt in densification in combination with the increase in remote working is that absorption rates will be marginally lower (20 bps) over the coming decade than they otherwise would have been.”
Joe Dyton can be reached at firstname.lastname@example.org.