Current Office Cycle Non-Apocalyptic, Rather Benign, Moody’s Says
Moody’s says the bearish views on offices are primarily relying on cherry-picked anecdotes.
Cherry-picked stats and anecdotes painted a false picture of the past two years.
Empirical office performance and leasing data relative to past downcycles, despite an onslaught of negative headlines for two years, is much better than some might think, according to Moody’s Analytics.
Two years after 2020’s recession, the current downturn for offices is historically benign, the research firm reported this week.
Moody’s dismissed the bearish views on offices as having primarily relied on cherry-picked anecdotes, finding that the real revenue impact of the COVID-19 recession has been the least damaging of all the booms and busts the office sector during the past 50 years.
“There are simply no clear signals that we are in the throes of an ‘office apocalypse’… yet,” Moody’s wrote. More:
- US office rent and occupancy rate declines following the 2020 recession are far less than the past three cycles.
- Conventional wisdom is that Class A offices will fare better if there are fewer tenants to compete for, but that performance bifurcation hasn’t broadly materialized yet in space market data.
- Total returns for institutional office investors took a minimal hit in the pandemic downturn, dipping slightly negative only in Q3 2020.
- Office loan delinquency rates never spiked through the pandemic.
Continued High Demand for Class A
Marc Benjamin, partner in Eversheds Sutherland’s Real Estate Practice Group tells GlobeSt.com, “Although the slower than hoped return to office in many large cities will certainly have an impact, my expectation is that Class A buildings, particularly in terms of location, efficient floor plates, technological upgrades and amenities, will continue to see high demand. That will be less so for class B, and I would expect to see significant challenges for class C.
“Ultimately, I won’t be surprised at all to see the owners of challenged assets handing back keys to their lenders, which after some time, will lead to a reset in pricing for those assets.”
Nor will remote work have as adverse an impact on office as some fear, Mark Goodman, principal of Mark Goodman & Associates, tells GlobeSt.com. “While the pandemic undoubtedly disrupted the traditional office environment, I do not see companies shying away from in-person office environments over the long term.
The lockdowns showed us that remote work is not only possible but can also be preferable and more productive for some, but there are limitations with a totally remote operation. Most companies and the people they employ recognize the value of connecting and collaborating with coworkers to foster shared values, build camaraderie and learn from one another.”