January 21, 2022
By H. Lee Murphy
As doubts persist about the comeback of the office sector once the COVID-19 pandemic is tamed, it has become clear that the damage sustained so far is not spread evenly across the marketplace. Suburban office buildings, close to where many workers actually live, are faring far better so far than central business district (CBD) high-rises, according to a Real Capital Analytics (RCA) study.
In the 18 months through August 2021, the prices paid for downtown offices had fallen 3.7 percent, the RCA data showed, while prices paid for suburban office properties actually rose a bullish 14.8 percent. In fact, for the first time in memory, the office vacancies in CBDs, at 20.2 percent, were higher than those in the suburbs, at 19 percent, according to Cushman & Wakefield data.
“We do think the move from urban to suburban is real,” said John Rivard, chief investment officer at Accesso Partners, a Florida-based office owner, in a concurrent session titled “Lessons Learned from the Pandemic: The Role of the New Office in a Post-COVID World.”
Recovery in the office market has inched forward to a point where offices in the 10 largest U.S. markets have reached 36 percent worker occupancy, Rivard said, though New York City is lagging at just 30 percent. “This is a pandemic high. The thinking is that this will continue to grow, and when it reaches a certain tipping point—perhaps 50 percent—it will ramp up faster,” he said.
Alejandro Romero, associate director of investments for Accesso, added that the 50 percent worker return hurdle is a key. “Once we get to the point that half of all people have returned to their offices, then 90 percent of the employees who care about their careers will probably want to return to their offices,” he said. When that happens, he and Rivard agreed, an increase in office building valuations would almost certainly follow.
And yet the breakdown of workers’ attitudes is split across generations. A Gensler study recent found that 31 percent of the youngest workers, generation Z, wanted to continue to work from home, while 37 percent of millennials, 44 percent of generation X, and 58 percent of baby boomers wished to continue remote working.
Some ambivalence toward returning to the office may be attributed to changed working conditions, Romero pointed out. In 1990, the average office allowed 280 square feet (26 sq m) of space per employee. By 2019, that figure had fallen to an all-time low of about 240 square feet (22 sq m). As companies seek to attract workers back to the workplace, they will be willing to reverse this so-called densification trend, Romero believes, though he admits that no matter what working conditions are, “Nobody knows how many employees will actually come back to work every day.”
The evidence suggests that cities with the highest-income workers—places like Encinitas, California, and Alpharetta, Georgia—have had the highest percentages of remote workers. In the top 10 work-from-home markets, income levels average $100,000 or more per year.
The two presenters at the session agreed that big cities like Chicago and New York would remain major office centers. But future growth is likely to be concentrated in places with a lower cost of living, they said. They singled out cites like Austin, Charlotte, Raleigh, and even Dallas. “The growth now is in Raleigh, not New York,” Rivard said.
To fuel new development, debt markets, which had been frozen in mid-2020, are in the process of full recovery. “There is so much capital that has to [get invested],” he said.
New leases, however, have become a problem. In one building after another, it is the smaller, lesser-credit tenants, bullish on the future, that are willing to sign long-term commitments. The biggest national-credit tenants, meantime, either are not yet willing to sign at all or are committing to just short-term contracts of a year or two. It is unclear when that process will get unstuck, Romero said.
The fortunes of the office sector are likely to continue to ebb and flow for a while. In the days before the Fall Meeting, insurance giant Allstate put its suburban Chicago headquarters, spanning 1.9 million square feet (177,000 sq m) on 186 acres (75 ha), up for sale, suggesting that more and more of its 42,000 employees would be working from home or smaller satellite offices in the future.
A little earlier, paradoxically, Google announced it was paying $2.1 billion for a Manhattan office building, the St. John’s Terminal building in Hudson Square. Romero predicted the Allstate property would eventually find a buyer and marveled at the Google acquisition, saying that for investors “who need to put out a lot of money, the office market is still the best place to do that.”