High Vacancy Rates And Lower Rents Offset By Longer-Term Opportunities, Reveals C&W

• New research from Cushman & Wakefield suggests that office vacancies will continue to rise and rental costs will drop until at least 2022.
• Short-term, ‘dedensification’ practices such as agile working and rotating shifts are becoming the norm for office-based workers during the pandemic.
• However, the research suggests that work-from-home preferences will gradually fade as society returns to a more normal operating environment, and longer term the office will “continue to serve a critical role in the way firms operate.”

Cushman & Wakefield recently published the first part of a four-part study series that looks at the effects of COVID-19 on the commercial real estate industry and the future of the office. 

The study, “Global Office Impact & Recovery Timing” focuses on some of the structural changes taking place at the moment and how they might impact global office markets and recovery times for the CRE industry. 

Needless to say, the COVID-19 pandemic has disrupted the global economy. It has accelerated shifts (like remote work and digital transformation) and created structural changes that will persist for years to come. 

C&W argues that the coronavirus pandemic “has created several forces that directly impact the office sector’s fundamentals. Some of the impacts are cyclical — for example, the COVID-19 recession will result in office-using job losses, higher vacancy, and will place downward pressure on rental rates. Other impacts are structural, such as a greater share of employees who will regularly work from home (WFH).” 

Looking at both cyclical and structural changes, C&W predicts how these changes will impact the CRE industry in the short and long term. 

Key Findings from the Study

• While structural shifts, like an increase in work-from-home practices will impact office occupancy, this will be offset by factors like economic growth, population growth, and office-using penetration. 
• Despite the short-term impacts that may be experienced, “demand for the office will continue to grow over the 10-year forecast horizon.”
• Globally speaking, office leasing fundamentals will be significantly damaged in the near-term due to the COVID-19 recession. 
• Cushman & Wakefield estimate that the pandemic and its effects will result in 95.8 million square feet of negative net absorption between 2020 Q2 and 2021 Q3 worldwide. 
• Global office vacancy will also rise. While pre-pandemic vacancy stood at 10.9%, it will rise to 15.6% in 2022 Q2. 
• As for rents, they are forecasted to decline 10.9% peak-to-trough from 2020 Q1 to 2022 Q1. 

WFH and Dedensification

Without a doubt, the number of people permanently working from home is expected to grow, especially in the US and Europe. According to Cushman & Wakefield, the number of professionals working from home is expected to increase from 5-6% to 10-11%. Additionally, the number of agile workers is also expected to increase, from 32-26% to just under 50%.  

Both of these trends will have an impact on office occupancy and office-using trends. 

And yet, it’s not all bad news for the commercial real estate industry. 

“One offsetting effect is the potential reversal of a decades-long trend of densification in which businesses have been absorbing less space per office-using employee. COVID-19 is requiring society to social distance in the near-term and disrupting the trend. It is still unclear if a structural reversal of densification—dedensification—will persist, however. At a minimum, we believe that densification will stop and that practices that allow for distancing, such as agile working and rotating shifts, will increase.”

Cushman & Wafield estimates that if densification is reversed in the aggregate, it could potentially offset some of the loss in demand caused by more remote working, “possibly offsetting it fully”. 

Another reason why the CRE industry will recover is that C&W believe that current work-from-home preferences will fade as society returns to a more normal operating environment and pandemic fears subside. 

Still, it is worth noting that occupier behavior and decision-making are likely to change due to the pandemic. But the good news is that “not all firms plan on reducing office footprints”, even with increases in work-from-home and remote work arrangements. 

“We believe our assumptions about WFH are grounded in a balanced view of the future — the reality that higher rates of work from home will be sustained while at the same time, the office will continue to serve a critical role in the way firms operate.”

Timeline for Recovery

Generally speaking, Cushman & Wakefield expect office vacancy to return to pre-pandemic levels (11%) by 2025. 

Rent wise, rents will bottom in Q1 2022 and begin appreciating from that point onwards. Pre-pandemic peak rent levels are also expected to return in 2025.