There are three key drivers that will shape office demand in the recovery ahead—and ultimately determine which assets and markets will be the winners and which will be the losers.
The U.S. office market started to show encouraging signs of stabilization during the second quarter of 2021 as many companies prepared to reopen their offices fully. However, one by one, companies are now announcing reopening delays due to the rampant spread of the Delta variant.
For over a year, the U.S. office market has been in a state of suspended animation as COVID-19 sent most office workers home. While the great disruption to the economy, everyday life and commercial real estate will likely eventually pass, we believe the office sector could endure the most profound long-term impact from COVID-19 among the five major property types, thanks to the forced, full-scale, work-from-home (WFH) experiment. Technologies and business processes have proven to be surprisingly ready to support remote work since the onset of the pandemic, and office workers appear to be enjoying their newfound work flexibility, with some seeking to keep at least some aspect of it in the future. Unsurprisingly, with these dynamics, we have seen far less consensus among real estate lenders and investors about future demand for office than any other property type.
In our opinion, broader adoption of remote work will be a net negative for office demand going forward, but the uncertainty and differentiated landscape will create opportunities for discerning investors. The accelerated adoption of remote work from the pandemic-induced WFH experiment has effectively compressed years of obsolescence into a span of about 18 months—and both companies and workers will increasingly have the ability to substitute technology for physical office settings. However, the top strategic priorities for most companies—growing earnings and attracting and retaining the best talent—are unlikely to be materially different post-pandemic. So, while earnings objectives increase the likelihood that companies will find a way to leverage technology to reduce their real estate costs, the intensifying war for talent will continue to make the office important—perhaps even more important—as a place for collaboration, cultivating corporate culture, training, mentoring, socialization and productivity.
For investors with or seeking office exposure, three drivers will shape office demand in the recovery ahead and ultimately determine which assets will be winners, and which will be the losers:
- The transition to a hybrid workplace
- Employment growth in science, technology engineering and mathematics (STEM) and creative industries
- The escalating war for talent