Seth Baum, Senior Analyst for Anvers Capital Partners, specializes in the commercial office sector and has contributed to this article. He can be reached at [email protected] .
Predictions that office market fundamentals would rebound early in 2022 may have been premature. Following the most abrupt downturn since the Global Financial Crisis, tenant occupancy appeared to bottom out in 2021. While it will decidedly improve before year’s end, business leaders appear to be in a first-quarter holding pattern. Although the current economic rebound has been tempered by seemingly see-saw pandemic policies that worry employers, many are champing at the bit to lease offices in 2022.
Suburban Office Markets Expected To Initially Fare Better
The Omicron variant reportedly set office returns back as January saw only 10 percent of personnel come back in major cities, compared to 40 percent during the first week of December. A Gartner study indicated employers sent staff members home in late December and 44 percent delayed reopening due to Covid uncertainties.
By contrast, suburban office markets will likely rebound faster than central business districts early in the year. Reduced population density and less reliance on public transportation position suburban vacancy to lead the great return to the office. In all likelihood, areas where people commute via bus, rail, or subways, will continue to be more heavily impacted by Covid infection rates and government mandates in the short term.
Coupled with high supply, downtown office vacancy rates will likely rebound slowly after hovering only 80 basis points below the high-water mark set following the Global Financial Crisis. Suburban markets will not necessarily be exempt, as some experience comparative vacancy rates of 3.7 percentage points. However, urban flight and other demographic trends point to improved office market prosperity in suburban landscapes.
Quality Office Space Proves Attractive
The occupancy rates of Class A office spaces reportedly sustained higher losses than Class B properties during the height of the pandemic. But as the so-called “New Normal” emerges, decision-makers are expected to return to brick and mortar workplaces and budget for improved quality office space.
That’s primarily because organizations that keep remote personnel in place may require a smaller footprint in 2022. Such budgetary factors allow them to spend more money per square foot in prestigious office locales. This trend bodes well for Class A rental property owners who may earn higher profits going forward. The top-line priorities prospective lease signers desire include access to touchless technology, flex spaces, indoor air quality controls, and smart apps. Property owners who upgrade buildings from Class B to A could reposition their business model to get a quick investment return and improve profitability in 2022.
How Will Remote Workforces Impact Office Markets?
With Covid mainly in retreat, industry leaders remain uncertain about a total return to the office. Recent Gartner studies indicate that upwards of 90 percent plan to employ a hybrid workforce policy that could minimize office space utilization by 15 percent.
But many major employers are not necessarily sold on managing employees without physically present oversight. Remote and hybrid employees partook in the Great Resignation of 2021, and CEOs have reportedly grown weary of rehiring people for critical positions. Adding to losses experienced by turnover, blurred corporate identity, and diminished organizational culture weigh heavily against virtual workforces. The conventional wisdom in 2022 revolves around CEOs pulling the plug on remote and hybrid policies and getting back into the office. Office occupancy restrictions continue to wane, and spaces have been adapted for health and safety. Covid-related mandates are steadily being rolled back. Denmark stands as the first EU nation to completely lift impediments and return to pre-pandemic normalcy. Other countries appear to be following suit. Barring unforeseen circumstances, companies are expected to migrate back to the office.