The COVID-19 pandemic has left many wondering about the future of the commercial real estate office market as businesses in the United States turned to remote working in March 2020. could be a good indicator of direction, according to a recent Reuters report report.
Business spending on video systems has increased, while plans to strengthen shared workspaces may indicate that at the very least, companies will use a hybrid working model when offices reopen. Although the pandemic is abating, sales of technologies for equipment used for remote working continue to increase, reports Reuters. Sales of USB cameras and computer microphones increased by 77% and 36%, respectively from March to May compared to the same period in 2020. These figures are double what they were during these same months in 2019, according to market research firm NPD Group.
Meanwhile, computer equipment maker Logitech International SA predicted earlier this year that webcam and cloud video collaboration equipment sales would remain strong this year. Sales tripled to $ 1.48 billion in the 12 months ended March compared to the previous year.
The impact of the pandemic on the CRE office
Technology sales are not the only indicator that the office building market may change in the foreseeable future. The way businesses design their offices is another sign that the five-day-a-week standard in office format may become less common. A recent Morgan Stanley survey found that a majority of companies are considering increasing shared workspace in an effort to lower their real estate costs.
“Executives at many companies would love to have everyone come back, but technology spending plans tell you that they recognize the need for a flexible workspace,” said Vikram Malhotra, real estate analyst at Morgan Stanley.
The increase in hybrid offices could impact the demand for workspace in major cities like New York and San Francisco. There have been fewer significant sales of office buildings in recent months, Reuters reports. Institutional office assets in cities are currently valued at $ 231 billion (New York) and $ 128 billion (San Francisco), according to LaSalle Investment Management.
At the same time, rental prices remain low, while vacancy rates remain high, which negatively impacts the value of CRE’s office buildings and makes transactions difficult. Total Manhattan office building sales fell by more than half to $ 5.4 billion in 2020, according to Cushman & Wakefield. In the first quarter of this year, sales of office buildings totaled just $ 41.9 million.
As long as the trend of working from home continues, homeowners will see their pricing power on leases, as well as the returns investors expect from office assets, diminish, Malhotra said. Morgan Stanley predicts that the change will reduce the amount of office space in the United States to about 13%. Real estate consultancy Green Street said in June that telecommuting could negatively impact demand for CRE offices by 15%.
“The prices in these big global gateway cities — New York, San Francisco — they’re the poster child, they’re sweet,” said Mark Zandi, chief economist at Moody’s Analytics.
Plans for returning to the business office
Many companies plan to allow at least some remote work, such as Swiss bank UBS Group, Reuters reports. The company recently announced its plans for a mostly hybrid workforce. Other companies like Goldman Sachs and Morgan Stanley prefer their staff back to the office full time. US health technology company Cerner Corp. said 75% of its 27,000 employees could be “dynamic” and telecommute half the time.
“We want to get the best of both worlds and we are confident that we can with this model,” said Tracy Platt, director of human resources at Cerner.
However, others don’t believe the hybrid model will reduce office space or be the preferred method in the long run. Piper Sandler analyst Alex Goldfarb said most employees will likely work in the office three to four days a week, making space consolidation more difficult to do.
“People want to be seen as part of the game, and there isn’t a game you can win if you’re not on the pitch,” he said.
There is no denying that the COVID-19 pandemic has accelerated the long-awaited office changes. The architectural firm Vocon had designed offices that saw 20% of its employees working in “hot desks” before the pandemic. These workspaces are intended to allow multiple workers to use a single physical workstation at different times. The company now claims that some customers allocate more than 40% to shared spaces.
“Does it make sense to require people to go to a certain place every day? Vocon owner and director Deb Donely said. “In some cases, it didn’t make sense before the pandemic. “
LaSalle analysts also noted that demand for CRE office space does not have to drop dramatically to have an impact on occupancy, rent and property values. A mere 5-10% drop in demand could increase the vacancy rate and delay the industry’s recovery for five to ten years. LaSalle has been ahead of the trend and reduced its exposure to office buildings ahead of the COVID-19 pandemic, Rich Kleiman, the company’s co-chief investment officer for the Americas, told Reuters.
“A lot of people haven’t accurately assessed the amount of capital needed in the long run to own an office building,” he said. “It’s not as attractive a risk-return proposition as some other types of ownership. “
Joe Dyton can be contacted at email@example.com.