Orange County Partnership - News

Office Market Recovery Will be Slow; Improvement Not Expected Until 2022

Global commercial real estate brokerage and services firm Cushman & Wakefield issued a report on the impact of COVID-19 on the U.S. and global office markets on Sept. 23 and its findings spell out a prolonged recovery that will take years, not months.


The firm’s first-ever Global Office Impact Study predicts that the world’s office leasing fundamentals will be significantly impacted by the COVID-19 recession and the work-from-home trend, but they will ultimately begin to improve in 2022 and will fully recover two to three years later (2025). The full recovery timeline is consistent with what was observed during the Great Recession, but at a slight lag due to the work-from-home trend, C&W stated.


Key findings from the 2020 Global Office Impact Study are concentrated on the full economic and employment recovery anticipated for the first quarter of 2022, and the corresponding demand for office space as vacancies begin trending downwards and rental rates begin appreciating. By 2025, global office vacancy is anticipated to return to pre-crisis levels of approximately 11%, with rents returning to pre-crisis peak levels.


“Even though the impact of work-from-home trends will slow the office market recovery, the overall growth in office-using job sectors along with many other factors—including agglomeration, culture/branding, and productivity—collectively indicate that the office will continue to play an important role in the economy going forward,” said Rebecca Rockey, Global Head of Forecasting at Cushman & Wakefield. “With this study, we’re looking into an uncertain environment through the lens of evidence, data and science.”


In Cushman & Wakefield’s “baseline scenario,” which has a 50% probability, the U.S. office sector is expected to shed 145 million square feet over the next two years (2020 and 2021) as it works through the effects of 1.7 million office job losses during 2020. The baseline forecast for 2020 office job losses calls for an improvement from the second quarter 2020 reduction of 2.6 million office jobs. In the second quarter of 2020 absorption was -23.1 million square feet meaning that there is potential for another 122 million square feet of negative absorption.


“The hit to demand for office space —measured by the level of net absorption—is approximately 20% more severe than what occurred during the GFC (Great Financial Crisis) period of 2008 and 2009, excluding the idiosyncratic risk of co-working/flex operators,” the report stated.


When viewed as a share of inventory, the difference is less stark but still sobering, the report related. During the Dot Com Recession and the GFC, negative absorption ultimately was -2.4% and -2.2% of 2001 Q1/2008 Q1 inventory (respectively); whereas in the baseline scenario, forecasted negative absorption totals -2.7% of 2020 Q1 inventory.


Cushman & Wakefield noted that current job losses and the return of co-working and flex operator space to the market are driving most of the office demand movement.


“In a world without COVID-19, absorption rates were already in structural decline due to densification—i.e., businesses were absorbing less space per office-using employee. In this scenario, we assume that the structural trend of densification comes to a halt. However, a new structural trend emerges in the form of increased remote working, which has a similarly negative effect on absorption rates,” the report stated. “More remote workers lead to less demand for office space per employee. The net effect of the halt in densification in combination with the increase in remote working is that absorption rates will be marginally lower (20 bps) over the coming decade than they otherwise would have been.”


In its “upside” scenario, which has a 10% probability—the office market will shed just 940,000 square feet, and jobs will begin recovering in 2021. In this scenario, job loss will recover in the third quarter of 2021. Like the baseline scenario, the upside scenario assumes that Congress will pass a $1.5-trillion COVID relief package, and that there will also a speedy resolution to the coronavirus.


The office market entering COVID had a relatively conservative pipeline and demand and pre-leasing rates were slowing. As of the second quarter of this year, there was 134 million square feet of office space under construction in the United States.


C&W predicts that the U.S, office vacancy rate will rise steadily from 13.0% in the fourth quarter of 2019 to a peak of 17.6% by mid-2022.


This increase will be tied with the highest vacancy rate on record in the aftermath of the Dot Com Recession (third quarter 2003). Asking rents are expected to fall by 9.3% peak-to trough, more than the 8.6% decline during the GFC, but less than the 17.8% drop after the 2001 recession.


Owners may look for creative solutions, including offering free rent and increased tenant improvement concessions, but aggregate annual average asking rents are ultimately expected to decline by 6.5% in 2021 and another 2.3% in 2022, Cushman & Wakefield stated.


“Asking rent declines usually lag deterioration in broader fundamentals, and we expect to see rents continuing to grow in 2020 despite weakening occupancy levels. As the U.S. economy returns to its pre-crisis GDP level (2022 Q2 in the baseline scenario), and as office-using employment surpasses its pre-COVID-19 peak a quarter later, the office sector will begin absorbing office space again and the demand metrics will begin to improve,” the report stated.


Over the 2022-2030 period, under the baseline scenario, C&W expects office demand to be 15.8% lower than it otherwise would be due to a structural increase in work from home programs, despite holding density at pre-COVID-19 levels.


“If companies expand per worker footprints by 25% due to health safety requirements, and if the effect is permanent, demand over this timeframe is decreased by only 8.2%. If companies were to expand per worker footprints by 50% permanently, the effect of work from home is fully offset,” the report noted.


To download a copy of the Cushman & Wakefield report, go to: