In the matter of a few days, the world “shutdown”, employees were told to stay at home which led to a significant decrease in demand for offices and a new way of work developed: remote working.
With the US national vacancy rate reaching 14.4% in the 3rd quarter of 2020, which was recorded at that time to be the highest level since Q3 2014 (the Q3 2019 national vacancy rate was 12.7%) and recorded a negative net absorption of 41.3M square feet according to a study conducted by Cushman & Wakefield
The US was not the only market impacted by this increase in vacancy rates and decrease of office demands, it became a worldwide trend as an example European average office vacancy rates have increased from 5.6% to 6.3% between Q1 2020 and Q3 2020 and occupation demand recorded in the Q3 2020 was 31% down against the five-year average according to Savills.
Nevertheless, cap rates on US stabilized offices have remained mostly unchanged with some slight increases in some parts of the country such as Atlanta who recorded an average increase on Class A stabilized office properties of 1 point between H2 2019 and the summer of 2020, in contrary some cities such as Houston experienced a compression of cap rates with Houston seeing a half a point compression according to CBRE. European office cap rates have witnessed to show similar trends during this time period.
As we are starting to slowly going back to a semi-normal life, US office vacancy rates still remain high with a 17.6% vacancy rate and a negative 8.6 M square feet absorption rate recorded for the Q4 of 2021 according to the Cushman & Wakefield marketbeat report.
Ongoing restrictions, increased demand from employees to stay in remote working permanently are all factors contributing to vacancy rates remaining at a high level.
A study conducted by Harvard Business Review concluded that 80% of employees want to work from home at least one day each week and firms not offering weekly work from home days are at risk to losing 40% of their employees.
Many firms are not liking this new way of work with the reasons cited being a lack a productivity and collaboration such as Goldman Sachs stating that “Goldman does not want to hire people for whom the most important thing is how many days they have to spend in the office.” and offering a salary increase of 30% for new hires, another example is Google announcing a pay cut for employees who would move to less expensive part of the country anywhere from 5 to 25 percent.
When if we are ever going back to pre-pandemic office level is one of the hottest topic discussed in the CRE industry with some experts stating that we are a just a few months away while others do not believe in a return to pre-pandemic level “The return-to-office date has died,” says Nicholas Bloom, professor of economics at Stanford University.
In the upcoming months, this is where we will see how the office sector will unfold with maybe some changes and adaptions such as smaller office spaces arranged as co working models made to accommodate hybrid workers, potential office reconversion into residential and other innovative ideas that will allow office owners to get back to pre-pandemic revenues.
Written by Tugdual C
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