Office Space in Need of a Booster

January 05, 2022

Combination line/column chart showing unstable demand in the office sector. Chart subtitle: Due to heightened concerns surrounding the Omicron variant, the outlook for office space remains murky amid unstable demand across markets and industries. Chart description: Left Y-axis shows Completion & Net Absorption (SF x 1000) ranging from -40,000 to +30,000. Right Y-axis shows Vacancy Rate from 0% to 18%. X-axis shows quarters from 4Q19 to 3Q21. Columns for completions and net absorption by quarter: 4Q19 at 17,834 and 13, 884; 1Q20 at 12,129 and 4,189; 2Q20 at 8,802 and -21,111; 3Q20 at 11,980 and -30,510; 4Q20 at 9,266 and -27,160; 1Q21 at 12,182 and -31,314; 2Q21 at 14,539 and -7322; 3Q21 at 11,015 and -5237. Vacancy rate line has steadily risen, from 12.2% in 4Q19 to 16.8% in 3Q21. Chart Sources: CBRE-EA, Barings Real Estate Research as of September 30, 2021. End chart description.

As the Omicron variant continues to spread like wildfire across the globe, companies once again find themselves modifying plans for a return to in-person work. Although the market for U.S. office space started to show signs of stabilization during the second half of 2021, the new wave of Omicron cases has already started to impede the recovery across most industries. As a result, the office sector could potentially endure the most profound and longest lasting impact from the recent case surge among the four major core property types. Current remote work dynamics and incremental office supply are expected to exert additional upward pressure on vacancy rates, which increased during the third quarter of 2021 to 16.8%. While the emergence of virus variants and the prevalence of unvaccinated individuals may act as catalysts for permanent changes within the office sector, many companies are expected to opt for flexible work schedules in 2022 rather than leasing additional real estate. With businesses contemplating further vaccination requirements, as well as continued travel restrictions and virtual interactions, there now exists a widening gap between occupied and underutilized office space. To that point, net absorption rates, which serve to quantify the difference between leases and vacancies, have fallen by roughly 120 million square feet during the pandemic, representing the largest drop since the 2001 Technology Bubble.

Going forward, corporations and employees alike may be forced to navigate through a unique work environment on a permanent basis. While hybrid and remote working approaches will likely serve as headwinds for the demand for office space in the aggregate, institutional investors may be well-positioned to achieve portfolio alpha with long-term exposures to high-quality tenants, Class A properties, office conversions, and distressed low-occupancy buildings. As a firm, Marquette will remain focused on working with our clients to target markets with a compelling mix of talent, demographics, and tenants.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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