Data decoding reveals sudden office market trends

Any casual observer of the office market would see the present situation as bleak, if not downright catastrophic. The headlines for the past two years or more have focused on the popularity of remote work, the battle between workers and employers versus work, and occupiers to cut back on their footprints. But there are plenty of bright sides to see, too. Occupancy levels after Labor Day have soared to post-pandemic highs, and there are good news scattered companies expanding their office footprints.

Much of the talk about the future of work and the office has been speculation, but it is clear that the office market is in turmoil, and transformations are underway. But that doesn’t necessarily mean the market will collapse completely, according to Kevin Fagan, head of economic analysis at CRE at Moody’s Analytics. Fagan recently told me that to get an accurate picture of the state of the office market, you need to stop chasing after often contradictory headlines and delve into the data. “It is important to realize that the office’s most pessimistic views have not yet been reflected in the data,” Fagan said. “This fall is when we’ll start to see more data that will indicate what’s really going on in the office market.”

Written by Fagan Moody’s report In June he carefully analyzed available data on the office market to back up his assertions that the current downturn in the office sector, compared to previous economic cycles, is historically benign. Fagan says negative views of the office have relied primarily on carefully selected anecdotes, informal surveys, and widely divergent views of fewer office space occupants. mayo rent per worker.

Meanwhile, the real revenue impact of the short recession caused by COVID has been the least damaging of all the office market crashes over the past five decades. He writes: “While net office demand may or may not slip as companies gradually rationalize their office space needs for their post-COVID workforce, there are simply no clear signs that we are in the midst of an office apocalypse…even right Now”.

Fagan explained that the performance of the office market is “procyclical,” meaning that it usually moves roughly in sync with business cycles. But he noted that the economic downturn in 2020 was an anomaly, and the collapse in office rents and values ​​did not materialize. The COVID-19 recession has been remarkably harmless compared to other recessions in US history. The last sustained decline in office rental and actual occupancy rates in 2008 was 12.3 percent and 5.2 percent, respectively, which was much more severe than the result of the economic recession in 2020. By comparison, Moody’s report shows that the overall decline in actual rent and occupancy rates Since the pandemic began, it has been 1.6 percent and 2.1 percent.

Historic and projected effective rent and occupancy of US offices

source: Moody’s Analytics CRE | Compared to previous cycles, how bad is the pandemic in offices? (

It is important to note that some US office markets have been hit hard compared to others. Sunbelt markets, such as Tucson, Arizona, and Palm Beach, Florida, saw year-over-year rental growth in 2021 of more than 4 percent. But markets like New York City and San Francisco Rents saw the worst decline in rents, dropping 4 percent and 3.5 percent, respectively. This should come as no surprise to real estate professionals, as much has been written about the struggles of New York City and San Francisco. Moody’s report said that these two office markets were most at risk due to higher population density, higher cost of living, and having the highest share of jobs that can be done remotely.

However, the report notes that office markets in New York and San Francisco have seen much worse in the past. From a debt perspective, there hasn’t been (yet) a significant rise in CMBS office loan delinquency in hard-hit office markets like New York and San Francisco. The rates of delinquency in these two cities are lower than they were before the 2008 financial crisis.

Historical delinquency rate for CMBS loans backed by office property

The bottom line in Moody’s report is that there are still no clear signs of a large-scale exodus of occupiers from the office market or an imminent collapse of property values. A few individual data points here and there build a case for office collapse, but when you delve into the data, the report notes that there are no significant trends that clearly indicate a sustained and massive decline in office values, occupancy or revenue.

The report states several times that current data does not mean that office downtime cannot or will not occur. As Fagan tells me, failure tends to happen gradually at first and then all at once, and he keeps a close eye on data points and indicators that can flash red before showing up in property values ​​and revenue. One of the biggest indicators Fagan is watching is the expiration of his lease contracts. Contrary to public comment, lease expiration shows the real choices office occupants make. Fagan also tracks subletting, lease terms, whether office floor plans are being redrawn, and if partial remote work is associated with office vacancies. “You can’t chase the headlines,” Fagan said. “One of the anecdotes about shrinking the company’s space doesn’t indicate a trend in the office market.”

Moody’s concludes its report by saying that between 2023 and 2025, we will begin to see some specific trends about the future of the office. more Office Rentals It will expire, and corporate occupants will make more decisions about their evolving office space needs. For the typical occupant, the cost of their employees is more important than the costs of their real estate. Companies must first settle on their post-pandemic style of business before they fix their real estate needs.

Companies that detect changing work habits are experimenting with it, and that will take a long time. If remote and hybrid disruptions are really damaging office values, that will be evident in data tracked by Moody’s and others in the next few years, but that hasn’t happened yet.

What may complicate this natural progression, though, is if the recession continues sometime soon, as many economists expect. “The difference now is that companies know they can switch to remote work,” Fagan said. “Companies don’t want to lay off employees, so if they have to make cutbacks, real estate may be a more attractive option to weed out financially stressed situations.”

Fagan’s biggest piece of advice to office owners is to look closely at their tenants’ business plans. Some industries are more prone to working remotely and mixed, and depending on the financial condition of the tenant, they may have less need for office space. “You need to do a more thorough analysis of the rental listing more than ever,” Fagan said. “There is a need for a more intense understanding of office tenants.”

The sky doesn’t fall… yet

Another recent report showing a more accurate view of the office market is the CBRE Survey of Tenants on Occupancy, Return to Business and Long-Term Portfolio Planning. scanning CBRE and CoreNet Global revealed that companies remain cautious and rental activity remains below pre-pandemic levels, but more occupiers appear willing to make long-term commitments on office footprints.

Thirty-one percent of occupiers say they plan to add office space over the next three years, 19 percent say it will stay the same, and 46 percent expect it to become smaller. These numbers don’t seem to bode well for office owners, but there is a caveat. Only 20 per cent of occupiers said they expected their footprints to expand in a previous CBRE survey in January 2021. “It is clear that occupiers’ decisions are not driven by cost-cutting or a desire to reduce their overall footprint,” the report said.

Which statement best describes the state of your real estate portfolio since January 2021?

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Office occupancy saw a rise after Labor Day, but remains low compared to pre-pandemic levels. Occupancy in 10 major cities reached 47.4 percent of pre-pandemic levels for the week of September 8-14, according to Kastle Regulations, marking a new high since the pandemic began. Some metro areas have seen particularly large rises in occupancy rates. New York City offices have struggled for a while, but occupancy numbers jumped from 38.6 percent on September 7 to 46.6 percent on September 14.

The increase in office occupancy is great news, especially as a weak economy, inflation and talk of a looming recession have caused some large multinational corporations to reduce office footprints. But while some companies are downsizing, not every corporate occupant is downsizing their property, according to Julie Whelan, global head of occupation research at CBRE. “Life sciences companies are still doing well and may be expanding, and some smaller companies are expanding office space as well,” Whelan said. “There are many scenarios where company occupants expand their footprints.”

Whelan noted that many office tenants are cautious about their real estate space decisions, and moves can be undone to reduce space. But given the high demand for quality office space, she said, renters may need to be careful about how much space they allocate. Class A and upper market offices do very well, so if a tenant gives up a quality space, they may not be able to get it back easily. The high demand for Class A properties also means that landlords need to know their tenants well. “If you are in a good location, office owners must ensure that the building is competitive with the right technology, amenities and sustainability so that tenants can achieve their ESG goals.”

One interesting finding in Whelan’s CBRE survey was the significant disconnect between what companies and employees want in regards to working remotely and back to the office. It is clear that many companies want a stronger return to the office and are pushing for it, but the survey showed that employees have other ideas. 58 percent of executives say workers visit the office less than required, while only 25 percent of employees agree with this statement. Whelan believes that companies are not using the right methods to get employees back into the office more often.

Executive sentiment versus their perception of employee behavior in relation to returning to the office

“Trying to bridge the gap through outreach and encouragement to go back to work is what occupiers do, but it is not enough,” Whelan said. Businesses have to talk about it Why Employees need to return to the office and access the true value proposition.” Whelan added that training managers to establish new standards and behaviors around returning to work is also critical because it establishes procedures for office visits, team meetings, and collaborations. Executives often define return mandates to office policies , but these policies are implemented at the manager level.

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Office - Product Design

Many said the recession could cause office occupancy rates to rise because workers might feel compelled to return, but Whelan isn’t buying that. “If you are trying to build long-term loyalty in a company, creating an impetus to return to the office out of fear is not the right way to go,” she said. “Distinguished and talented employees will remain competitive in the labor market, even during a recession.”

All of these subtleties about a company’s return to office politics may seem out of the way for office owners and landlords, but knowing these things is more important than some might think. As Moody’s Fagan said, office owners need to know more about their tenants, including their business plans, how they plan to use the office, and the policies they use to get employees back into their offices. A prospective tenant with an opaque and weak back-to-office policy may not be as valuable as someone with a better plan.

Many predicted the death of the office and an imminent collapse, but important data about the office market simply do not show that this happens. For now, the good news for office owners is that compared to previous historical cycles, office values ​​and revenue have not been affected. Headlines may scream all over the end of the office as we know it, but the actual state of the market lies behind that in the hard numbers. It will take some time to understand what is really going on, and most of the talk now is just noise.

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