Thursday, September 24, 2020

Office Market Could Shed 145M Square Feet in the Next Two Years

 By Kelsi Maree Borland

The office market has been rocked by the pandemic, thanks to both widespread job loss and remote work mandates. Now, a new report captures the pandemic’s impact on the office market as well as looks at a potential path to recovery.

In the company’s baseline scenario, which has a 50% probability, the US office market will shed 145 million square feet of office space in the next two years, through the end of 2021. Job loss is the driving force behind the degeneration of the US office market, with the report anticipating a loss of 1.7 million jobs in 2020. This is an improvement compared to the 2.6 million jobs lost in the second quarter.

To put the impact of the pandemic in perspective, it was determined that office demand will decrease 30% more during the pandemic than it did during the 2008 Great Financial Crisis. Negative absorption will also outpace prior recessions. In the Great Financial Crisis, absorption totaled -2.1% of total inventory, and in the previous recession, the Dot Com Recession, total office absorption totaled -2.4% of total office inventory at the time. In the current pandemic, they estimates that office absorption will decrease 2.7% of total inventory. These numbers represent the market contraction through the total downturn.

The end of the road is hard to see. Today, re-opening companies and co-working and flex office providers are driving the leasing demand, but once the dust settles, there will be a clearer picture of permanent remote work policies and other hybrid models that could reduce the need for office space. As a result, the baseline scenario predicts that the US office vacancy rate will peak at 17.6% with negative absorption in both 2020 and 2021.

It is important to note that the pandemic didn’t initiate this trend. Office users have been shedding office space and moving to denser workplace models for years—and there office absorption rates were experiencing structural decline. The pandemic could reverse that downsizing trend now that employees need more space for social distancing. However, in place of densification, remote work policies will likely continue the trend of reduced needs for office space. As a result, the report postures that absorption rates will actually trend lower than they had under the densification trend.

This is the firm’s baseline outlook. The report also includes a downside and upside scenario. In the downside scenario, which has a 10% probability, job losses will continue into 2021 with a total of 2.9 million jobs lost through the downturn, and the recovery will begin in 2022. This scenario also assumes that Congress will not pass another round of relief, resulting in increased bankruptcies and creates a fiscal cliff. Overall, the downside scenario will see negative absorption of 291 million square feet nationally through the end of 2021 and office vacancy peaking at 20.2%. This would be the highest vacancy rate in 25 years.

On the upside—a scenario that also has a 10% probability—job losses will total only 940,000 square feet, and jobs will begin rebounding in 2021. In this scenario, job loss will recover in the third quarter of 2021. Like the baseline scenario, this scenario assumes that Congress will pass a $1.5 trillion relief package, and it also assumes a speedy resolution to the virus. With stronger and swifter job growth, the office market would only see 69 million square feet of negative net absorption through the end of 2021 with the national vacancy rate peaking at 15.6%.

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