The combination of the growing hybrid and remote work trends, increased vacancies and decreased demand has made office commercial real estate one of the most troubled sectors in the industry. But, there’s still reason for CRE office to be optimistic, according to Jessica Morin, U.S. Office Research, CBRE, GlobeSt.com reports.
Morin noted that there’s a potential positive recovery outlook as offices look to stabilize as they come out of the remote work environment and think about an uncertain economic situation. She pointed to the improved office vacancy periods that occurred during 2021. During these times, leasing activity outpaced pre-COVID-19 pandemic levels for several months. The spike fell when economic troubles arose months later, but Morin saw it as a good sign that cyclical trends will outweigh remote work in the near future.
Meanwhile, demand measured by tenants in the U.S. has been stable in 2023, but office CRE leasing activity hasn’t stabilized yet, according to Morin. Tenants are holding off on making leasing decisions until the economic picture becomes clearer.
“This mix of the economic uncertainty plus the hybrid work makes it difficult to discern which is the primary cause of reduced demand,” she said. “Once we have economic stabilization, we can really expect to see a rebound in TIM and leasing activity.”
The office construction slowdown is also expected to continue “for the foreseeable future.” This is a good sign for office landlords—so is the fact that office completions peaked in 2021, according to Morin.
“That’s also going to support market fundamentals once we see demand pick up in late 2024,” she said.
In terms of pricing, the prime office market has helped keep rents afloat, according to Julie Whelan, CBRE Global Head of Occupier Thought Leadership. Whelan noted the prime office market has been “very resilient” during the COVID-19 pandemic and into this year, GlobeSt.com reports. Meanwhile, quality has been key in office tenants’ decision-making process, but that’s changed to tenants seeking better spaces at a lower price.
The flight to quality comprises finding newer buildings (built since 2010) with positive net absorption, Morin said. Additionally, higher quality buildings in an area such as Manhattan that have easy transportation access, are renovated and well-amenitized, have an availability rate around 13 percent. Mid and lower-quality buildings’ availability rate is closer to 21 percent.
In the end, the office market’s fate will come down to how offices are used during the next few years, according to Morin and Whelan.
“The way we work has permanently changed,” Morin said. “As a result, many occupiers are solving for new portfolio strategies and those strategies are often resulting in contraction. That reality is at the core of what is challenging office market fundamentals today.”
Morin also noted CBRE’s spring 2023 occupier sentiment survey showed more than 75 percent of respondents in Europe and the U.S. reported average utilization that’s less than 60 percent.
“In the US, there’s a greater variability (than in Europe) in how organizations are utilizing the office, with many leaning into the office, but still some leaning into remote,” she said.