How companies shifting from hybrid working models will impact the office asset class
The battle over remote and hybrid work is intensifying as companies summon employees back to their desks. While this trend offers a lifeline to struggling office landlords, the question remains whether it’s too little too late.
Still Struggling
Since the pandemic, office building valuations have plummeted, driven by the high vacancy rates they’ve experienced as a result of the remote work trend. Office owners and their lenders tried to “extend and pretend”, but after two years of rising interest rates, owners are still struggling to refinance.
Rate cuts are surely helpful, but they won’t deliver the magnitude of relief that is needed. It’s a long road ahead, but we’re starting to see some signs of hope for landlords and their lenders.
Time to Return
The future of work remains a heated topic of debate. Most companies initially embraced hybrid and remote models. There have even been some studies that show the hybrid model can increase productivity. Employers, evidently, aren’t all convinced that hybrid work is a workable long-term solution. A growing number of corporations are now enforcing strict in-office policies.
Twitter and Tesla were among the first to require employees to return to the office. More recently, Amazon's CEO, Andy Jassy, announced a mandatory five-day workweek, sparking pushback from employees. Dell followed suit, prompting a scramble among staff to adjust their routines on short notice.
The purpose and rationale for these announcements are open to interpretation, but broadly speaking they are examples of a broader shift that appears to be positively impacting the office market.
On the Plus Side
The data is moving in the right direction for landlords:
- South Florida is leading the way with over 90% of employees in the region back in the office. That’s 20% higher than the national average.
- CBRE's net absorption index turned positive for the first time in two years during Q2 of this year. What’s more, this trend isn’t confined to one market. The majority of markets measured in the index moved in the positive direction.
- Most recently, JLL’s Q3 report noted that while absorption was still negative, leasing activity continued to tick up and we saw the sharpest decline in availability since 2018 driven by office-to-housing conversions.
What’s Next?
While delinquency and special servicing rates still look poor, these data points are good leading indicators of progress on the long road to recovery for office spaces. Investors are starting to sniff out opportunities, with many believing that the bottom is near or here. They are snatching up office buildings, hoping to capitalize on repositioning and conversion opportunities.
Existing property owners are still hoping for brighter days ahead, whether through sales, refinancing, or managing their way through the recovery. It’s going to be an uphill battle, whether you’re a current owner or buying in today. Nonetheless, the signs of recovery provide a glimmer of hope for a brighter future.
