The office market has been rocked by the pandemic, thanks to both widespread job loss and remote work mandates. New numbers from Cushman &Wakefield capture the pandemic’s impacton the office market as well as look at apotential path to recovery.
In the company’s baseline scenario,which has a 50% probability, the USoffice market will shed 145 million squarefeet of office space in the next two years,through the end of 2021. Job loss is thedriving force behind the degeneration ofthe US office market, with the reportanticipating a loss of 1. 7 million jobs in2020. This is an improvement comparedto the 2. 6 million jobs lost in the secondquarter.
To put the impact of the pandemic in
perspective, C&W has determined that
office demand will decrease 30% more
during the pandemic than it did during
the 2008 Great Financial Crisis. Negative
absorption will also outpace prior reces-
sions. In the Great Financial Crisis, absorp-
tion totaled - 2.1% of total inventory, and
in the previous recession, the Dot Com
Recession, total office absorption totaled
- 2.4% of total office inventory at the time.
In the current pandemic, Cushman &
Wakefield estimates that office absorption
will decrease 2.7% of total inventory.
These numbers represent the market con-
traction through the total downturn.
The end of the road is hard to see.Today, re-opening companies and co-working and flex office providers aredriving the leasing demand, but oncethe dust settles, there will be a clearerpicture of permanent remote work policies and other hybrid models that couldreduce the need for office space. As aresult, C&W’s baseline scenario predictsthat the US office vacancy rate will peakat 17.6% with negative absorption inboth 2020 and 2021.—Kelsi Maree Borland
The pandemic has opened the door to a whole host of negotiations about rentabatements, other concessions and leaseadjustments between retail landlords andtheir tenants.
“The pandemic has highlighted theneed for many leases to have a greaterdegree of flexibility to accommodate significant business interruption better,” says
Omar Eltorai, market analyst at Reonomy.
Eltorai says the pandemic has produced
a greater interest in more flexible lease
terms. In particular, he expects the percent-
age lease concept to grow more popular.
Percentage have generally only existed
for large retailers, according to Eltorai.
“The way that the leases work is that they
have one fixed rent component and one
variable rent component,” he says. “The
fixed component is the base rent, which is
LEASE CONCEPT IS
POISED TO SPREAD
OFFICE MARKET COULD SHED 145M
SQUARE FEET BY 2021
Like the rest of the commercial real estate community, the net lease sector experienced a grim second quarter.Unlike the rest of the industry, though,net lease appears set to have a robustsecond half. That was the consensus ofthe panelists at GlobeSt.’s Net Lease virtual conference.
“Things have come back since the pandemic started,” Barclay Jones, EVP for iStar,
told listeners. “I think Q3 will be a strong
quarter.” Part of what shut the firm down
those early, he added, were the bottlenecks
that immediately sprang up as the world
retreated to their homes in the Spring.
Those have been largely resolved, he said.
Of course it was more than just
Gerry-rigged closing processes that
kept deals at bay during those days.
Gino Sabatini, head of Investments
for W.P. Carey, said the REIT did very
little volume in Q2 and instead took a
wait-and-see approach to the market.
He, too, is bullish about Q3 and is
looking forward to a strong deal flow.
NET LEASE SECTOR
LOOKS FORWARD TO
ROBUST SECOND HALF