What Are Office Investors Watching as the Pandemic Wanes?

Warehouse ImgAs the COVID-19 pandemic starts to wane in the U.S., the commercial real estate market has been closely monitoring the status of the most heavily impacted segments to determine if the time is right to start deploying capital in new acquisitions – and no product type is being watched more closely than the office sector, as work from home became dominant for the last year. Some investors have been hesitant to pursue new acquisitions, even with incredibly cheap financing available, for fear of what the future of office looks like. After a recordsetting year in 2019, where the single-tenant office sector reported annual sales of $28.7 billion, the market saw transactions plummet in 2020 with sales volume only reaching $18.7 billion. That drop is almost solely a byproduct of the uncertainty that has confounded the marketplace.

With the pandemic’s end on the horizon, investors are now keenly focused on seeing if the time is right to return in earnest while interest rates remain very low, and pricing in other commercial real estate segments remain very aggressive. With that being said, here are some of the dynamics that investors are most closely following:

 

What are companies that have sizable office presences throughout the U.S. doing?

Office investors are looking to some of the nation’s largest companies and thought leaders to see how they are approaching the question of returning to the office. Investors have a good degree of faith that the voices of the industry titans represent a good barometer of what other smaller corporate leaders throughout the U.S. are thinking. Just this month, both Goldman Sachs and JPMorgan Chase announced their intent to return to the office. Chase has set a goal of 50 percent of its workers returning to the office on a rotating basis by June, with CEO Jamie Dimon saying: “We want people back to work, and my view is that sometime in September, October it will look just like it did before.” Meanwhile, Goldman Sachs recently announced a goal of having workers back to the office by June 14.

What do employees want?

Office landlords understand that while executives ultimately make real estate decisions and sign leases, their decisions are very much impacted by how their rank-and-file employees want to work. Particularly in times of low unemployment, companies must be responsive to their employees to recruit and retain them. In March 2021, Eden Workplace, a workplace software company, released a poll showing that 85 percent of workers want to return to the office in some capacity, with the majority of those respondents (52 percent) saying that social interaction with colleagues was the primary reason. This would seemingly bode well for office owners, insomuch as it shows that offices are still a core part of the American social fabric.

How much impact has there been on the office market, and how will it play out in 2021?

Warehouse Img Kastle Systems, an electronic access company, recently reported that office occupancy (not percent leased, but rather percent physically occupied) still has only risen to 26.5 percent of where it was before the pandemic. This will be a telling statistic to monitor for landlords, to see how fast this rises in the months ahead. Additionally, investors will closely be watching the amount of sublease space that stays on the market, which is at an all-time high. Although there are reasons to be optimistic about an office recovery, there are a great many headwinds still blowing that will require discerning analysis from investors in the months ahead.

 

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