Cyclical Office Trends Will Ultimately Outweigh Remote Work Movement: CBRE

Article originally posted on Globe St. on August 8, 2023

CBRE analyst panel offers some optimism for office next year.

Office is the asset that has the most challenged fundamentals in today’s environment. Reduced demand, rising vacancy, and rents that are declining are all bellwethers of this market right now.

However, Jessica Morin, U.S. Office Research, CBRE, offers a potentially positive recovery outlook as offices look to stabilize coming out of the prevalent work-from-home environment and ponder today’s uncertain economic picture.

She cited the improved office vacancy over periods of 2021, when leasing activity exceeded pre-pandemic levels for several months before the economic struggle truly set in months later, as a good indicator that cyclical trends will outweigh “work-from-home” in near future.

In the US, demand measured by tenants in the market has remained stable this year, but office leasing activity has not yet stabilized, she said.

“Tenants are deferring these leasing decisions until there’s a greater degree of economic clarity,” Morin said. “This mix of the economic uncertainty plus the hybrid work makes it difficult to discern which is the primary cause of reduced demand.

“Once we have economic stabilization, we can really expect to see a rebound in TIM and leasing activity,” she said.

A slowdown in office construction that should continue “for the foreseeable future” should also boost landlords’ spirits as well as knowing that completions peaked in 2021, she said.

“That’s also going to support market fundamentals once we see demand pick up in late 2024,” Morin added.

Julie Whelan Global Head of Occupier Thought Leadership, CBRE, said rents have been buoyed by the prime office market, and that the prime office market has been “very resilient” throughout the pandemic and into this year. She said flight to quality has often driven the office market, but that has shifted from occupiers taking better space for a lower cost.

“Price sensitivity doesn’t seem to be the driver behind the success of the market,” Whelan said.

Morin said a flight to quality is involving younger buildings, with positive net absorption in those that were built since 2010 throughout the pandemic. Vacancy rates in these buildings are about 400 basis points below the overall average, according to CBRE.

Better buildings in Manhattan, where there’s this easy access to transportation and renovated and well-amenitized buildings, Morin said, have an availability rate closer to 13%, whereas the availability rate for mid- and lower-quality buildings is near 21%.

Ultimately, the fate of the office market depends on how the offices are used in the coming years, Morin and Whelan said.

“The way we work has permanently changed,” Morin said. “As a result, many occupiers are solving for new portfolio strategies and those strategies are often resulting in contraction. That reality is at the core of what is challenging office market fundamentals today.”

Morin said CBRE’s spring 2023 occupier sentiment survey showed more than 75% of respondents in Europe and the U.S. reported average utilization that’s below 60%.

Unlike in Europe, Morin said, “In the US, there’s a greater variability in how organizations are utilizing the office, with many leaning into the office, but still some leaning into remote.”