Commercial real estate research analysts Green Street projects that San Francisco will have the worst performing office market in the United States in 2021, Bloomberg reports. Green Street’s recent report forecasts that San Francisco’s rent and occupancy rates will decrease by 22% in large part because technology companies will continue to work remotely amid the COVID-19 pandemic. The firm believes New York will suffer the second largest drop at 17% as office towers have been vacant for months due to financial company employees also working from home.
“San Francisco and New York will likely see a permanent resetting of rents as people and businesses look more toward the middle of the country for expansion,” Green Street analyst Danny Ismail said. “It’s unlikely that rents and occupancy will return to a level pre-COVID-19 over the next few years.”
San Francisco and New York have long served as hubs for technology and finance companies, respectively. The CRE owners who have financial and technology company tenants have felt the pandemic’s negative financial impact, too. The situation has caused tenants to seek cost-cutting measures, and a common one is reevaluating how much space they need to operate. The answer is often telework or moving to a less costly location to open another office.
Nashville, Charlotte, Austin and Atlanta are some of the cities that are enjoying these tenants’ decision to relocate, according to Bloomberg. Green Street expects that they will all show rent and occupancy growth. However, overall office space demand is expected to decrease by approximately 15% through 2025 as remote work trends continue to grow.
Lack of office market demand could remain issue for big cities
San Francisco and New York were at the top of Green Street’s list of office markets that are expected to perform the worst in 2021, but they weren’t the only large metro areas on it. In fact the next six markets at the top of the list all fall in the “large metropolitan” category—Los Angeles, Chicago, Washington D.C. metro, Boston, Seattle and Miami.
Meanwhile, it is likely that CRE office space owners in these cities aren’t the only ones who feel financial strain because of increased telework due to the pandemic. There’s somewhat of a snowball or domino effect at play here. If employees in larger cities are opting to work from home, all of the retailers, restaurants and bars surrounding these offices are going to suffer financially, too. A lot of these places count on workers to comprise a good portion of their daily business. No employee foot traffic leads to a lot less revenue, which leads to an inability to pay rent.
Rent collection, or the lack of it, might be the biggest domino in this equation. In commercial real estate, everyone owes somebody something until the bank is paid. Unfortunately, tenants in these bigger cities aren’t earning enough to make their rent payment. In turn, property owners are unable to collect enough to pay their mortgage. Meanwhile, eviction moratoriums have prevented CRE owners from taking any punitive actions against non-paying tenants, leaving their hands somewhat tied.
The falling office market issue is likely to last throughout 2021, regardless of when the COVID-19 pandemic subsides. Even as workers begin to return to their offices and patron nearby restaurants and shops again, it could be some time before tenants can truly pay what they owe landlords in back rent. It could be an even more trying time for tenants who signed a guaranteed deals and are staring at a $3 million price tag when things get back to normal. Although, it might be an even trying time for the landlords who are unable to evict them.
Joe Dyton can be reached at firstname.lastname@example.org.