Office Pricing Gets Murkier Waiting for Recovery

Article originally posted on Globe St. on August 24, 2020

Office properties are performing better than one might expect during the pandemic thanks to  attractive locations, diverse tenant bases, and long-term lease structures. However, all that is set to change unless there is a “full and soon” recovery in the greater economy. In the meantime, price discovery has been challenged and if the recovery takes longer than expected certain cities could lose their premium pricing.

That’s according to a new report out from Reonomy called “Workplace Worries: Opaque Office Outlook” which looked at over 535,000 transactions valued at $500,000 or more in retail, industrial, multifamily, and office space across 336 metropolitan standard areas in the US

Reonomy’s research found that the average office lease currently sits at 6.7 years for properties in publicly-listed real estate investment trusts. That means that about 15% of the market comes open or up for renewal each year. During the pandemic, the report finds, leases are less likely to be renewed immediately with employers adopting more flexible remote work policies and facing budget constraints, downsizing, or possible bankruptcy. “The typical company spends close to a tenth of its budget on its office space, so this is an area that will likely come into focus for expense reduction if the recovery is slow,” the report concludes.

Although office properties have not been as negatively affected as retail and hospitality properties where the point of sale is in-person, there has been a drag on overall transaction volume. In the first half of 2020, the total number of office deals was down 23% compared to the first half of 2019, from about 4,400 to about 3,400. Much of that decline was due to a steep dropoff in the second quarter, which was down 47% from 2019.

“While this disruption is noteworthy by itself, the rapid decline in market activity and transactions also has challenged price discovery across the office market,” the report says. The report notes that in July less than one-third of all office property transactions were proceeding on schedule.

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