In August Moody’s analytics forecasted office vacancy rate will hit a historic high of 19.9% in 2021, surpassing the 1991 record high of 19.7% to reach 19.9% in 2021 and 20.0% in 2022.
The office sector is also projected to incur significant distress in effective rents, which we expect to fall by 10.4% nationally in 2020—including as much as 21% in New York and other markets.
“Many companies continue to push back returning to the office, with some already planning to telecommute until 2021. Whether the increased availability of remote working infrastructure will have long-term effects on office demand remains to be seen,” said Victor Calanog, Head of CRE Economics at Moody’s Analytics.
“However, the long-term nature of office leases means that it may take some time for vacancy rates to reflect the real trend.”
And conditions have only deteriorated since then.
As of October, only 10% to 15% of office seats were occupied, according to JLL research. The firm said that moving forward, conditions will remain highly volatile and rapidly changing, dictated by the trajectory of broader economic indicators and public health conditions.
JLL said that the U.S. office market registered more than 28.9 million square feet of occupancy loss in Q3, surpassing the previous record of -23.2 million square feet in Q2 2009. Year-to-date net absorption fell to -42.3 million square feet as a result of these losses combined with a smaller amount of give-backs in Q2.
According to the most recent research by Statista, vacancy rates across the office sector increased to an average of 15 percent in the second quarter of 2020. The jump from nine percent in the first quarter of the year is primarily due to the impact of the coronavirus.
San Francisco’s office-vacancy rate has roughly doubled this year to 8.3%, driving asking rents down almost 9%, according to real estate firm CBRE.
Let’s all face reality.
The markets for office real estate space have officially imploded.
They are now in a death spiral freefall to vacancy oblivion.
Please do not let anyone convince you otherwise.
This is a commercial real estate crash scenario.
We just haven’t hit the ground yet because we have some time to get to the bottom.
No property, investor, or city is immune to the economic fallout of what is to come.
Every major city’s economy has been hit hard by coronavirus lockdowns.
Millions of U.S. businesses had to shut down their business operations overnight, and since last Sring, hundreds of thousands of companies have closed their doors for good.
The lucky survivors were deemed essential by the U.S. government and their employees were allowed to keep their jobs but were forced to work from home.
Overnight, millions of offices went vacant has millions of employees learned what it was like to work from home and raise a family.
The toilet paper sold out, and Zoom crashed as the nation’s employees got drunk learning to navigate their new realities.
At first, many people were confident that workers would want to return to the office.
But after six months of remote working, it turns out that they were wrong.
Most people do not want to come back to the office.
“The Future of Workplace,” a Cushman & Wakefield report from, August that included 50,000 respondents, found that 73 percent expect their companies to offer flexible working practices for the foreseeable future, according to Commercial Observer.
The report also found that the future of the office will involve some sort of balance of 1) work from home; 2) the office itself; and 3) so-called “third places” between the two, such as coffee shops.
“Before, the presumption was, I have to be in the office, because that’s the place I get my work done, and things will only work if most of us are there,” said Aditya Sanghvi, a senior partner at consultancy McKinsey & Co. and co-author of the firm’s “Reimagining the office and work life after COVID-19” report released in June.
“That notion is gone.”
Now, it looks like their employers have also had a taste of lower overhead and fewer management headaches have also announced they like their employees working remotely.
The massive work-from-home shift that the coronavirus forced on companies nationwide has proven mostly successful, except for one area, office property owners, whom it is quickly proving to be their undoing.
The new resurgent coronavirus has thrust office workers back into lockdown yet again.
Tech companies have long been the saving grace for landlords by leasing millions of commercial office square feet but sad to say, and those times are over.
And it looks like they are never coming back.
Recently, some of the world’s largest tech companies who lease millions of office square feet have announced plans to allow their employees to work remotely going into 2021, and some have made plans to do so indefinitely.
A new survey reported by CP Executive of 250 technology companies by the brokerage firm Savills found that 82% of respondents said they anticipated needing less office space in the next 12 to 18 months.
The survey, “COVID-19 Impacts on the Technology Industry,” released Oct. 7, found that 55 percent expect to dispose of space during the same period.
What’s more, such prominent office users as Facebook, Google, Twitter, Amazon, Wells Fargo, Royal Bank of Scotland, and Viacom have all said that their employees can work from home going into 2021.
Twitter announced in May that it will let some employees work from home ‘forever.
“If our employees are in a role and situation that enables them to work from home and they want to continue to do so forever, we will make that happen,” said Twitter’s vice president of people, Jennifer Christie, in a statement to CNN Business. “If not, our offices will be their warm and welcoming selves, with some additional precautions, when we feel it’s safe to return.”‘
In a live-streamed town hall in May, Mark Zuckerberg, Facebook CEO estimated that half of the company could be working fully remotely over the next decade.
“When you limit hiring to people who live in a small number of big cities or are willing to move there, that cuts out many people who live in different communities, have different backgrounds, have different perspectives,” Zuckerberg said.
The most recent announcement was In August when Facebook said it will let its employees continue to work from home through July 2021.
Google announced in May plans to keep 200,000 full-time and contract employees working remotely until at least July 2021. In September, the company said it was working on “hybrid” models, including rearranging its offices and figuring out more long-term remote work options for employees, as most of them say they don’t want to come back to the office full-time.
Sixty-two percent of Google employees want to return to their offices at some point, but not every day, according to a recent survey of employee office preferences the company released this week, according to CNBC. So Google is working on “hybrid” models, including rearranging its offices and figuring out more long-term remote work options, Alphabet CEO Sundar Pichai said in an interview with Time magazine.
“I see the future as being more flexible,” Pichai said in the interview. “We firmly believe that in-person, being together, having a sense of community is super important when you have to solve hard problems and create something new so we don’t see that changing. But we do think we need to create more flexibility and more hybrid models.”
Earlier this year, Pinterest Inc. paid almost $90 million to terminate its lease in a new downtown tower because it is “rethinking where future employees could be based” in a post-Covid era. Housing startup Opendoor paid $5.2 million to end its downtown lease early, a regulatory filing showed.
Payment platform Stripe announced in September that it would give $20,000 to any employee who moved away from New York, San Francisco or Seattle, but the worker’s base pay would also be cut up to 10 percent.
Tech “companies have been among the most flexible with allowing people to work remotely, and many workers are taking advantage of that,” said Danielle Hale, Realtor.com’s chief economist.
Just this week, the billion-dollar software giant who just made headlines with a $27.7 billion deal to buy workplace messaging app Slack. According to an article in Bloomberg, the company won’t be expanding its commercial real estate footprint — quite the opposite.
Chief financial officer Mark Hawkins said on a call with investors last week that Salesforce planned to consolidate and sublease specific sites as more people working from home.
“The pandemic has also empowered us to reimagine how we operate in this work-from-anywhere, digital world,” Hawkins said on the call, which was reported by Business Insider. “In Q3, we continue to reimagine our operations after analyzing our global lease commitments.”
The move will result in a writedown of between $80 million and $100 million, the publication reported.
According to Cushman & Wakefield’s latest “Bright Insight: 2020 National Legal Sector Benchmark Survey,” released in July, 96 percent of respondents from the 608 law firms and associate participants surveyed anticipated their attorneys would work from home more often in the next five years.
That survey was conducted before the start of the pandemic.
The facts are that tens of millions of square feet of whole office complexes now sit empty as some of our country’s largest company’s implement more work-from-home policies and some permanently.
The more time employees get acclimated to working from home, the more people who do not want to return to the office due to safety and other reasons.
As time moves forward, we can only expect this trend to continue.
Now, office property owners, managers, and creative marketers will need to convince them to come back, but it looks so far, like no one is listening.
The big problem I see is that the Office Property Crash of 2020-2021has just begun and we have a long way to go to get to the bottom.
Maurice ‘Moe’ Bedard is the Chief Inspector for U.S. Commercial Building Inspections of Southern California. He is a certified inspector with the Certified Commercial Property Inspectors Association (CCPIA), the International Association of Ce-rtified Home Inspectors, and the International Association of Certified Indoor Air Consultants (IAQ2).
Do you need a commercial property inspection, a virtual inspection, or specialty field services? Call 619-514-4419 today!