Is the world of office buildings going to end? Cushman & Wakefield’s Ken Ashley weighs in.
I work as an office tenant representative. In other words, I advise companies who are looking for office space. In my business, the past couple of years has been like winter at the South Pole.
It’s been very popular to beat up on office buildings in the press. The scary headlines do get lots of clicks.
At cocktail parties, friends who know what I do for a living give me sympathetic looks as if I have a terrible malady. I appreciate your concern, everyone. I am doing fine.
However, the beat down on office is misguided and I have a little different view than conventional wisdom of how this down cycle plays out.
To review the situation; we’ve had quite a ride since March of 2020 when the pandemic forced a sudden and mass evacuation from our workplaces. As the health emergency abated, we were like deer looking around the forest after a fire. Curious, timid, and ready to get back to our hiding holes.
Next, we went through a phase where office demand fell massively in part because CFO’s understandably grew tired of paying for office space when no one was coming in. The resulting pull back was largely due to rising interest rates and reduced commercial real estate lending from banks (even for stronger sectors like industrial and multifamily) combined with an already challenging capital markets environment. The uncertainty around the office market continues today and has increased the likelihood of defaults on office properties.
Where you work has a real impact. And now, we are now almost 4 years since Covid’s made its mark on the entire world.
One issue in the reporting on this subject, is many see office space as monolithic…meaning one product that is the same across the board.
Of course, this is not true. There are various iterations of the product (Class A, B and C) and locations differ widely. The Pacific Northwest is very different than Texas or Georgia, for instance.
As Collin Connolly, CEO of office building landlord, Cousins, said recently,
Office is not obsolete: obsolete offices are obsolete.
I would add that the location is critical as well. I heard a landlord say recently on office buildings, “it’s not about the space, it’s about the place.”
To break this all down, here are three office predictions that I believe will change everything:
Prediction #1: New office space delivery is slowing significantly
Deliveries of new office space will fall by a third in 2024 and two thirds in 2025 (based off of 2023 deliveries). By 2027, the entire US is forecast to be at a virtual standstill with only 5.8 million square feet delivering country wide.
Prediction #2: Some office space is obsolete and will be destroyed or redeployed
According to Cushman & Wakefield’s “Obsolescence Equals Opportunity” report, millions of square feet of office space will be adapted to medical office, life science and other non-traditional uses. Also, millions more square feet will be torn down and replaced by multifamily housing, retail or other uses.
Prediction #3: Employers will hire more knowledge workers that will need office space
While Cushman & Wakefield Research forecasts there will be office-using drop losses in 2024, the rebound will start in 2025 with 370,000 jobs added in that year and nearly 2.2 million office-using jobs added through the end of the decade (3.8 million or 11.6% more workers than 2019).
So, this is really like a case study in your economics class. Supply goes down. Demand goes up. The market dynamics change.
Result? Like water, the constraint of new supply and the increase in demand will start to solve the problems in the office market.
It plays out like this:
The first office product to get leased will be Class A+ space in Sunbelt markets. The flight to quality is real and smart business leaders will secure this space soon. As I said above, it will be years before significant new office construction occurs.
Next, older Class A product will get absorbed, then down the stack into Class B. Even some Class C product will find new life as companies start to run out of options.
Every disaster movie must end somehow. And in the same way prognosticators said retail was dead (couldn’t be further from reality), the same is true of office.
This time next year could look different and the office market will turn around much more quickly than the headlines suggest.
Companies should start thinking about office needs early and often and execute on them as soon as possible. I’ll see you in the office soon.
