Amid Many Unknowns Here’s What We Do Know About the Office Sector

Much of the future of the office sector is cloudy. We don’t know how many people will return to the office. We don’t know when they will return to the office and what working spaces of the future will look like.

The one thing that isn’t in doubt is that 2020 was a challenging year for office landlords with 104 million square feet of negative absorption, according to C&W Chief Economist Kevin Thorpe. That was more than the market lost throughout the entirety of the Great Financial Crisis. Before the pandemic, vacancy was 12.9% before hitting 15.5% by year-end.

As companies look at 2021 and beyond, there are many facts on the ground to help guide them despite the overall uncertainty, Thorpe says in a new report

Thorpe’s main takeaway is that the vaccine’s rollout and the return to the office will take time. Amid this uncertainty, most companies are in wait-and-see mode. In fact, almost one-third of renewals last year were for one year or less. That is triple the usual number.

“Many are just kicking the can down the road until they have more clarity,” Thorpe writes.

Even with uncertainty in the market, Thorpe doesn’t think businesses are leaving CBDs or large cities. With some people moving to the Sunbelt, Thorpe says it’s important to keep an eye on migration data. But he still thinks it’s best to wait and see and not make bets one way or another. So far, the majority of movements seem to micro and not macro-based. That means people and businesses will be more likely to relocate within the same city and less likely to relocate to a different city.

One thing that isn’t changing is the draw of talent. Thorpe says that businesses will continue to be drawn to labor.

Eventually, real GDP should grow to 4% to 5% for the year. With the worst of the pandemic probably behind us, Thorpe thinks the future looks bright for office.

Still, rents will decline in 2021 as tenants start to make more decisions and take advantage of the oversupply in the second half of 2021. However, C&W believes rents will bottom in most markets in the first half of 2022.

And none of this is to discount the headwinds the sector is facing.  In a recent report, Green Street said that slipping job growth and an uptick in real interest rates pose a significant risk to the office sector. While an increase in remote work remains enemy number one for the foreseeable future, a score of other factors are also at play. 

The Green Street report notes that the outlook for job growth in office-dominant industries—likely driven at least in part by increased automation—is less favorable than in years past, and a slowdown in “TAMI” sectors (tech, advertising, media, and information industries) has further decreased office demand.