The Office Market In A Post‑Covid World

office leasing

John Murray, PIMCOs Global Head of Private Commercial Real Estate, and Francois Trausch, Allianz Real Estate Chief Executive Officer and Chief Information Officer, discussed their views on the market, especially in the office space segment. It is therefore debated if commercial real estate will be able to reinvent itself, remain relevant in a post-COVID world, in which work-from-home (WFH) culture and online shopping are threatening to devour the market share of the retail and office sectors, both of which were very profitable until the recent rise of work-from-home (WFH) culture. Commercial real estate, particularly retail and office space, has been severely affected by the COVID-19-induced New Normal around the globe. The WFH trend has led to weakening demand for larger office spaces, and even the rental market has taken a hit.

As a result, Green Street projects that office demand will fall 15% in the U.S., which is in the middle range of the potential wider outcome, which was triggered long before Covid-19 precipitated WFHs early in 2020. With these factors in mind, Green Street projects continued weakness in the office market across most of Europe, and more so in the U.S., where Green Street estimates that private market values are falling by around 8% since Covid-19 2019. The full effect of Covid-19 on office property is not yet certain, but the UK markets snapshot points to challenging times ahead.

As of late Q3-2021, the Manhattan market alone had about 77 million square feet of available commercial office space. Office space absorption in six large cities in 2020 was 27.4 million square feet, which was down 51 percent year-over-year (from 55.7 million sq. Tokyo’s office affordability rate remains pandemic high, above 8%, compared to only 2% in 2019. In New York, for example, the Midtown Manhattan Office Availability Rate – a measurement of commercial spaces that are either empty or on track to be empty-is almost 18 percent, compared with around 10 percent prior to the COVID-19 pandemic, according to data from CBRE, a global commercial real estate agent. In the core industries clustered around downtown information, finance, professional, science and technology, and management – most jobs can be performed outside of an office, and many of those shifted toward telecommuting during the COVID-19 pandemic.

Considering many manufacturing jobs cannot be performed remotely, industrial-type commercial properties (e.g., factories, warehouses, distribution centers, and warehouses) were not affected by the pandemic nearly as much. While the majority of businesses experienced some level of commercial real estate adjustments as a result of the COVID-19 pandemic, those within particular industries faced a number of sector-specific challenges. The virus has brought about a shift toward remote work, as companies around the world closed offices and sent worker’s home. The pandemic hastened a long-term trend toward working from home, creating winners and losers among the real estate holdings of office buildings. The pandemic accelerated e-commerce and work-from-home movements, changing markets and creating winners and losers incommercial real estate sectors. What commercial real estate analysts are finding now is that the COVID-19 pandemic has amplified those existing trends toward a greater degree of workplace collaboration and flexibility. In the wake of the COVID-19 pandemic, property owners looking to sell or rent office space are operating in a changing landscape, where prospective tenants are looking for workplaces that fit the requirements of the post-COVID world, with its focus on flexibility and safety measures. Some employers have held onto their corporate leases even as hybrid work arrangements have led to employees spending less time at the office, while others have reduced their property footprints or given up their spaces entirely.

It is clear that many employers are taking the hybrid approach–some hours at the office, some hours working from home—to open workplaces again. More importantly, 80 percent of those employees report that they would rather work from home. Even when firms reopened workplaces, significant numbers of employees chose to stay remotely, leaving office spaces considerably less occupied. Views have tempered since the early years of the pandemic, with a now-common perception that a new normal would still involve lots of offices.

In our view, industrials are big winners, retail is the long-term loser, and offices holds winners and losers. Multifamily saw volume declines of only 12 percent; that compares favorably with retail, which declined by 42percent; offices, which declined by 36 percent; and industrial/logistics, which declined by 41 percent. The COVID-19 pandemic is leaving lasting impacts for businesses across sector lines, dramatically changing the way they use their commercial buildings. When Facebook committed to have office leasing 67,800 square meters (730,000 square feet) of property at the former Post Office Building in Midtown Manhattan in 2020, New Yorkers ranging from mayors’ offices to street vendors to the city’s property moguls pointed to the agreement as proof that office culture would not become the pandemics next casualty. Commercial property investors will do well to note variations in office markets, especially within the U.S. Institutional investorslooking to maximize exposure will likely adopt platforms that invest in office property products while owning underlying assets.

The big operating platforms that are now used for investing and managing retail assets, especially in the U.S., may be the template for managing office real estate. Those focused mostly on allocating capital across various asset classes and geographies may transition more fully into offering targeted investment products, while also tapping the pool of active office real estate managers when needed. We think that premium offices, those with open floors that maximize the amount of available space, in higher-density cities, will be more resilient to secular trends toward working from home, compared with lower-quality offices in lower-density locations, which we expect will feel the squeeze.