The Silver Linings Office Playbook

February 28, 2024 • John Salustri

The folks of Cushman & Wakefield have found the elusive silver lining in the cloud overhanging the office market. For instance: “The office is still a central part of the economy and a driver of productivity, career development, culture and innovation.”

And so the services firm states in its recent report, “The Bright Side of Office: Growth Opportunities in the Urban Core.” Of course, the sentiment has been a battle cry for BOMA International and its members for years, as was borne out in three national surveys of office decision makers throughout the pandemic and a series of Deep Dive reports.

To refresh memories, in the 2022 COVID-19 Commercial Real Estate Impact Survey, 76% of the 1,267 nationwide office decision makers said employees and colleagues “are generally supportive of returning to the office.”

In addition, “Tenants are more positive (71%) on the power of in-person, human connection and still care (71%) about investments that keep them safe. Further, with Zoom and pandemic fatigue setting in for 69%, employees are looking for safe, comfortable and productive workplaces that invigorate them.”

Fast forward two years, and Cushman aligns itself with that analysis, providing a bad news/good news assessment of the office market today. On one hand, there is the ongoing impact of hybrid work protocols on space demand as well as the obsolescence of much of the existing stock and the effects of both on core-market occupancy. Indeed, the latest BOMA Deep Dive focuses on receiverships in the office market underscoring the solid sense of reality that overhangs any blue-sky sector outlook.

That said, “the death of cities has been overstated,” proclaims Cushman. “In fact, net migration patterns have returned from 2020-2021 extremes and in some cases look more promising for large cities than they did prior to the pandemic.” Net out-migration from six gateway markets currently hovers at 17% lower than five years ago. In 2022, the year of the last BOMA survey, international immigration into the US tripled after a five-year slump, This is noteworthy, says the report, since “international immigration is a key driver of population growth in large North American cities.”

The vibrancy, diversity and economic  opportunities to be found in the urban core is an ongoing attraction, says the firm, which is why “Occupier interest in CBD office submarkets has boomeranged slightly over the past four years.”

The operative word there, of course, is “slightly.” Cushman expects an increase in vacancies this year as tenants continue to right-size. Earlier this year The Wall Street Journal reported Moody’s figures of a 19.6% US office vacancy rate, the highest since 1979. Nevertheless, Cushman states that, “even with supply-side challenges,” CBD vacancies outshine that of the suburbs in 40% of US markets.

Could hybrid work protocols actually help here? “In a hybrid work environment,” says the report, “many occupiers continue to look at centralized, urban office locations as the best option for their workforce.” Further, as pandemic fears continue to fade, the report outlines a growing trend to more in-office work, not less.

This too echoes the findings of the 2022 BOMA survey: “Tenants this year are more likely (57%) to see ‘more value’ in their office space, indicating enthusiasm to return to the workplace and collaborate with owners/managers regarding telework and hybrid work environments. Having a ‘home base’ community for connection is a recurring theme, including space for more group gatherings, and 78% agree that having a place for interactions with clients and customers is fairly to very important.”

The pre-pandemic office-construction pipeline (185 million square feet of deliveries since 2020) certainly didn’t help the now-inflated vacancy rate. Happily (if that word fits here), rising construction costs and shrinking labor numbers are helping to stem that tide, and only a third of that number is expected to go on line through 2025. It is a dynamic that points to more renovation and upgrade of existing spaces by wannabe occupiers.

Given this and the possibility of new entrants into the market, once this short period of 2024 vacancies passes, the report points to national vacancy declines in 2025.

And wait.  There’s more. Cushman predicts a 2025 post-recessionary employment recovery, and next year should end with 2.5 million office workers than there were five years ago, with another 1.8 million in the decade’s second half. This will point to 67 million square feet of absorption between 2025 and 1027.

Of course, there ae cities and there are cities. Those that can redefine themselves and boast specific traits will be the big winners, offering such attractions as:

  • Housing density;
  • Walkability;
  • Public-transit access; and
  • Highly amenitized neighborhoods.

These CBDs, the report concludes, “will continue to drive agglomeration effects, attracting college-educated residents, young employees and office workers.”

Stay tuned.

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