Hybrid Work Arrangements Unlikely to Stress Office Sector

Moody’s Analytics REIS, New York, said the office sector is unlikely to see a massive decline in demand for space and values per square foot due to increased hybrid work-from-home arrangements.

“There is continuing uncertainty about what the ‘world of work’ looks like post-COVID,” said Victor Calanog, Head of Commercial Real Estate Economics with Moody’s Analytics REIS. “Some [employers] have welcomed the return to office space; other employers have received significant backlash from their employees when they tried to codify what ‘flexible working’ means. Many are wondering whether recent trends pointing to record high resignation rates are connected to this transition period, with the crisis prompting employees to figure out what they really want from their jobs.”

Calanog said he expects office vacancies to continue rising for the next two years as employers and employees figure out the optimal configuration of office space needs. His firm’s current forecast suggests national vacancies will continue rising from 18.5 percent currently to the mid-19s. He noted the national vacancy rate averaged a significant 16.9 percent from 2011 to 2019, suggesting that one-sixth of U.S. offices were vacant even during a nearly decade-long expansionary period.

“We also expect forecasts of negative rent growth for 2021 to lessen in severity given the lack of current evidence of big rent drops,” Calanog said. “We cannot rule out the possibility of a longer slide in rents, particularly if employers really do begin shedding 5, 10 or 15 percent or more of their current space. Counterbalancing all that are economic tailwinds from U.S. real GDP expected to grow at rates unseen in four decades, along with office and school re-openings by the Fall that might prompt physical occupancy to rise to levels comparable to pre-COVID trends anyway.”

Calanog noted there could be “idiosyncratic” anecdotes on both sides of the argument. “News will be replete with employers coaxing their employees back to the office–with employees reacting both positively and negatively,” he said. “There will also likely be news about employers shedding office space or moving locations. But will average occupancies, net rent growth and actual pricing trends reflect how office as an asset class is headed towards systemic disfavor? We argue that this is unlikely to be the case.”