Office demand comes roaring back as stocks in the space play catchup
It’s possible that you will soon return to work if you haven’t been back yet.
In March, there was a sudden surge in office demand after a slowdown for five months, probably due to the highly contagious coronavirus variant omicron. It is unlikely that the pandemic will slow down, although demand for office space will continue to grow. However, offices will be remodeled as workers’ needs change.
Stocks behind offices are beginning to reflect optimism about office space. Earnings are rising faster than expected as rents increase and vacancies decrease.
New tenant tours showed that office demand was approximately 20% higher than it was in February. It was also up about 8% from one year ago. recent reportVTS is a platform for commercial real estate technology. Tours are a good indicator of future leasing.
According to Moody’s Analytics, the office vacancy rate for this quarter was 18.1%. This is an 18-basis point decrease from last year. The sector is experiencing its first ever annual decrease in five year and a marked improvement on the 18.5% peak pandemic vacancy rate.
Nick Romito (CEO of VTS) stated, “Demand this month for office spaces is more in line what we expect to find this time of the year.” Looking ahead, I anticipate that demand will continue to ebb in the typical seasonal pattern. However, to truly break the long period of low demand seen recently, demand must exceed seasonal norms for many months.
Tenants are driving rents up slowly. Moody’s estimates that the quarter saw the most impressive performance since the outbreak of the pandemic. Effective and asking rents rose by 0.2% each. Moody’s also reported that annual rent growth reversed the downward trend.
However, the new office demand is only two-thirds higher than the pre-pandemic peak, according to the VTS metrics. The top regional gainers are Boston, Chicago, Los Angeles, New York City, San Francisco, San Francisco, Washington, D.C.
The sector’s prospects are positive but office stocks, which are largely REITs and are not yet in the black, remain mixed.
Boston Properties, Hudson Pacific, SL GreenAnd Empire State Realty TrustThey are all below levels pre-pandemic. Hudson Pacific, for example, dropped 40% during the pandemic but has slowly recovered. Although it is now up 28% since the pandemic low, the stock is still in red for the year.
Boston Properties is one example. They have seen a rise in sales over the last year. Boston Properties’ first quarter earnings were better than anticipated Monday.
In a March note to investors, Alexander Goldfarb (a Piper Sandler REIT analyst) stated that while rent growth is slow, there’s still demand for space. Tenants are bringing back their workers, giving BXP confidence in COVID being over. This should speed up the occupancy rebound and provide upside earnings.
New survey of 185 offices in America by CBREIt was found that 36% of employers believed the process for returning to office is already under way. A little over 25% said that they would have it done by the end June. A little over 13% of respondents said that their employees could return to work, while 10% remain uncertain.
VTS reported that office occupancy was still below half in April (at 43%). This was still a record-breaking high.
Worker’s can expect major changes when they return to work, both in terms of cleanliness and air filtering, as well as in how they conduct their businesses.
CBRE found that employers are requesting more technology in the office to improve video conferencing. The availability of “free address” seating is expected to increase. Nearly three quarters of all companies stated that they plan to use open desks instead of cubicles or assigned offices.
A large number of hybrid jobs will become a reality, as 70% of employers say that they are open to allowing employees to work from home or at the office. Nearly half of those surveyed said they desire a balanced mix. They expect flexible offices to be more common because of this. According to the survey, just over half of employers stated that they would add various forms, including open desks and dedicated floors, to their existing office spaces.
Julie Whelan (global head of CBRE occupier research), stated that “that flexibility is desirable for any number of reasons including the ability to scale down or up, give employees greater choice over where they work, and even preserve capital,” But employees benefit from having productive space with good facilities and the opportunity to experience good amenities.