Office demand picks up again as supply in space catches up
If you haven’t been back to the office yet, you will probably be soon.
After a five-month lull, possibly due to the extremely contagious omicron variant of the coronavirus, new demand for office space skyrocketed in March. Without another major setback in the pandemic, it could will continue to increase, but the offices themselves will experience a shift as demand from workers changes.
Optimism in the office has emerged in the stocks behind the office sector. As rents rise and vacancies decrease, earnings are beating expectations.
Office demand, as measured by travel by new tenants, was 20% higher in March than in February and up about 8% from a year ago, according to a report. recent report from the VTS commercial real estate technology platform. Tours are considered an early indicator of new hires.
Office vacancy rates in the first quarter of this year fell 18 basis points from a year ago to 18.1%, according to Moody’s Analytics. This is the industry’s first annual decline in five years and a marked improvement from the 18.5% vacancy rate at the height of the pandemic.
“Demand for office space this month is more in line with what we expect this time of year,” said Nick Romito, CEO of VTS. “Looking ahead, I would expect that we will continue to see demand fall and flow in a typical seasonal pattern, but to really break out of the extended period of demand decline we have seen in year-end, we’ll need to see demand exceed the norm seasonality over the course of many months.”
Demand is gradually increasing rents. According to Moody’s, effective rents and rents increased by 0.2% and 0.3% respectively during the quarter. Year-over-year rent growth also reversed a downward trend.
However, despite the spike, new demand for office space is still only two-thirds of the pre-pandemic average, based on VTS figures. Boston, Chicago, Los Angeles, New York City, San Francisco and Washington, DC make up the best performers by region.
And while signs are upbeat for the sector, office-related stocks, largely REITs, are mixed.
Boston Attributes, Hudson Pacific, Green SL and Empire State Realty Trust all remain below pre-pandemic levels. For example, Hudson Pacific was down 40% at the start of the pandemic and then slowly started to rise again. It is up 28% from the pandemic low but remains in the red year-to-date.
Some, like Boston Properties, have rebounded in the past year. Boston Properties reported better-than-expected earnings for the first quarter on Monday.
Alexander Goldfarb, REIT analyst at Piper Sandler, writes: “While rent growth takes time, demand for space leads BXP to believe that COVID is over, as tenants bring their staff back, this should accelerate the recovery of occupancy, yielding returns,” Piper Sandler REIT analyst Alexander Goldfarb wrote in a note to investors in March.
One new survey of 185 companies using offices in the United States by CBRE found that 36% of employers said a return to the office was underway. Just over a quarter said it would be by the end of June. About 13% said it was up to their employees to return to the office, and 10% remained uncertain.
According to a VTS report, offices are still less than half in April, at 43%. But that marked the height of the pandemic.
When workers return to the office, they can expect to see dramatic changes, not only in air cleanliness and filtration, but also in the way they conduct their business.
The CBRE survey shows that employers are turning to more in-office technology tools to enhance video conferencing, as well as sensor-to-use and no-touch options. There will be more than so-called “free address” seats. Nearly two-thirds of companies said they intended to use an open desk rather than an assigned office or workroom.
There will also be more jobs combined, with 70% of employers saying they intend to allow workers to work in the office and work remotely. Nearly half said they wanted it to be an even combination. Therefore, they expect more flexible office space. According to the report, just over half of employers said they would add forms ranging from open floors to “dedicated floors indistinguishable from traditional office spaces”.
“That flexibility is desirable for any number of reasons, including the ability to scale up and down, giving employees more choices,” said Julie Whelan, head of employer research at CBRE. be more selective about where to work or even just preserve capital.” “But employees benefit from productive workspaces in good locations with amenities and often great experiences.”