There is much concern about the future of commercial office space. There is no denying that the work from home trend is real and the impacts will be felt in the short and long term in different ways. But ultimately, what will be the net impact on the office space sector? A new report from Cushman & Wakefield, examining the global impacts of the pandemic on commercial real estate predicts office leasing will be significantly affected for many years to come with increasing vacancies and decreasing rents in many parts of the world. The highest level of vacancies will occur in the U.S., Canada, and European countries in the coming years at a net negative level of over 200 million square feet. Even prior to the pandemic, businesses were reducing their footprint in the west, but the significant job losses and work from home (WFH) trend has and will hit the leasing market hard for quite some time. A net 215 million square feet of office vacancy will have been lost due to the pandemic. Global office vacancy will rise from 10.9% pre-Covid crisis to 15.6% by Q2 2022.
However, there is a silver lining ahead as the study predicts that the office sector will see full recovery eventually. Global office vacancies will return to their pre-Covid peak levels in 2025 at 11%. Office demand will return in the long run, despite the fact that office vacancies are at an all-time high right now and that the WFH trends are not going anywhere. The study forecasts that permanent work from home will double over the next 10 years. Despite current trends and even further adoption of WFH predictions, full recovery will be offset by economic growth. Employee growth and the continued demand for office space due to a likely hybrid approach to office work will fuel the need for office space in the future. It is also important to note that office demand trends and habits vary tremendously across the globe. For example, the Asia-Pacific region and Greater China are less impacted by WFH trends and are more inclined to keep working in the office. Below is a breakdown of each region’s unique impact and recovery path.
In contrast to the rest of the world, the office leasing market in ASIA-Pacific (excluding China) has not been hit as hard by the pandemic. Although the region has and will not remain unscathed, resilience is driven by demographic growth in emerging markets and the overall positive management of the virus. Demographic growth will help mitigate office-job losses. It is predicted that office-job losses will return to pre-pandemic levels by the third quarter of next year in the report’s baseline scenario. Based on demand as measured by net absorption, the region is forecasted to remain positive from now through 2030, even though there will be a slowdown over the next 6-18 months due to job losses. From 2022 to 2030, net office demand will likely grow by 729 million sq ft. “Increased flexible working and work-from-home practices are less prevalent across the Asia-Pacific region as a whole compared with other regions, and so do not meaningfully alter the outlook for the region’s office market,” said Dr. Dominic Brown, head of insight and analysis for the region at Cushman & Wakefield.
The greater China region varies the most in terms of outcomes, trends, and predictions in comparison to the rest of the world. Unlike most regions, China was not forced to adopt remote work practices throughout the pandemic. As soon as the pandemic hit, they went into an extremely short and intense lockdown. Their ability to get control over the virus resulted in employees going back to the office and resuming “normal office life” again. In addition, since the lockdown period was relatively short in duration, there was no time for new “work from home habits” to sink into their behavioral patterns. Therefore, remote work is still viewed with apprehension. On top of that, WFH trends have not impacted China because a majority of tenant demand (approx. 85%) comes from domestic companies. Even though more office jobs will be created in 2021, the rate is still lower than in the past because of a demographically-driven decline in the size of the labor force. Office employment is expected to increase from its 10.6% share of total employment to 15.3% by the end of the decade, supporting an average increase of 3.2 million office jobs per year from 2021-2030. However, much like other parts of Asia Pacific, Greater China enters the crisis during an office construction boom so the extra supply will create a tough environment for rent prices and debt financing.
Considering that Europe is such a diverse area, the impact of the WFH trend depends on each country. For example, big cities such a London and Paris will have a higher portion of employees working remotely due to factors such as the high cost of homes, long commute times, and overall congestion. The Nordic countries will also have more remote workers but mostly due to their excellent IT and communications infrastructure, along with their openness toward the benefits of remote work. Some places in Central and Eastern Europe with a smaller population and lower workplace density will not be impacted by the WFH trend. The baseline scenario for European office employment is for a loss of 1.2 million jobs in 2020. Accounting for this job impact alone, net absorption demand in the European office sector is forecast to contract by 39.4 msf (1.1% of inventory) over the next two years, with most of that (-29.1 msf) occurring in 2021. In 2022, office demand again turns positive, driven by an improving labor market. Office-using job employment is expected to reach its pre-crisis level by the third quarter of 2022.
The US has been hurt the most in terms of overall office space demand. The US office sector is expected to shed 145 msf over the next two years (2020 and 2021) as it works through the effects of 1.7 million office job losses during 2020. In a world without COVID, absorption rates were already in structural decline due to densification—i.e., businesses were absorbing less space per office-using employee. In the near term, more remote workers leads to less demand for office space per employee. In the U.S., under the baseline forecast, the study expects the average vacancy rate to be 14% this year, hit 16.2% in 2021, peak at 17.4% in 2022, and come down to 16.9% in 2023 and 15.7% in 2024. Also, under the baseline forecast, rents are expected to be up 3% this year followed by two years of rate decreases, with the highest rent projecting a 6.5% drop in 2021 and a smaller drop of 2.3% in 2022, before increasing by 2.6% in 2023 and 3.5% in 2024. Although recovery will be slow, demand will turn positive again in QC 2022 and full recovery can be expected by 2025.
Factors Driving Future Office Demand
For better or for worse, the pandemic has disrupted and transformed how we work and operate in the corporate world. Remote work has proven itself and undisputed benefits for employers and employees have been gained. This much we know. But is the future of the office dead? Now that remote work is the new normal, do we still need the office? The answer to that question is not that cut and dry. Ultimately, it is not just one or the other. Surprisingly, an increase in remote work does not actually mean a decrease in office demand. It is just not as simple as that. There are many more complex factors that influence whether or not office space is needed.
One of the biggest factors driving office demand is the economy and employee growth. If the economy is doing well, and jobs are booming, then the need for office space to house such things as innovation, productivity, corporate culture, and team bonding offset any increases in WFH trends.
Another recent influencing factor is the current trend toward office-densification in order to ensure proper social distancing measures and personal safety. These new ways of redesigning the office could result in companies needing more space. During the last decade, office space density was on the rise with shared desks, workspaces, and open offices. The pandemic reversed that trend completely and might have a lasting impact even after a vaccine is distributed due to a new emphasis on health and well-being. Commuting is also playing a huge role in preventing the full return to the office. People do not want to use public transit. And employees have reported that travel time saving is the greatest benefit of working from home. We are also witnessing how cities are forced to adapt and rethink their transit system. Trends such as people moving into suburbs vs cities also plays a role and affects office leasing decisions. Many other factors such as technology, financial returns, the evolving purpose of the office, productivity levels, and the inherent need for human interaction all play a big role in demand.
Most predict a new hybrid approach where we work both from home and the office. The design and layout of offices may change with more collaborative spaces, smart technology, and more room to circulate. But as it has in the past, the purpose of the office will continue to evolve with our needs and patterns. But the office may shift to a place where we create bonds, build corporate culture, host clients, brainstorm, and attract talent than our traditional nine-to-five workstation habits. But they are not disappearing and demand will continue.