Ever since the coronavirus pandemic erupted, office building attendance has been sluggish. Not shockingly, lease renewals took a back seat during the pandemic, with many companies struggling to figure out what their office space needs look like.
The delta variant has only complicated matters. Companies that were planning to return workers to the office are now rethinking or postponing those plans.
But still, the demand for office space is expected to rise as 2021 progresses. At this point, many companies (and employees, for that matter) are done with remote work and are looking to resume in-person collaboration.
Although deal volume has not yet picked up, a recent report from Transwestern shows that tour activity at office buildings has increased across most major markets. That means that new leases could follow shortly. And that's great news for real estate investors who have money in office REITs (real estate investment trusts).
Still, landlords don't seem all that willing to compromise on rents at this stage of the game. And whether that's a smart strategy is yet to be determined.
Should office landlords come down on price?
Although the vacancy rate for office buildings is 12.6% on a national level, annual asking rents are up 1.9% compared to last year. And while office landlords may expect leases to pick up during 2021's final quarter, whether it makes sense for them to charge higher rents from the get-go is not so clear.
On the one hand, commanding more rent will allow office buildings to recover more swiftly from the events of the past year and change. But some office building tenants may be turned off by the idea of not being offered an initial discount.
Still, holding firm on asking rents isn't such a bad move at a time when jobs are coming back at full speed and companies are getting closer to making concrete plans for a full-fledged office return. At this point, 77% of the office-based jobs that have been lost since March 2020, when the pandemic really took hold, have been recovered. And as the economy improves, that percentage should grow. Employees whose jobs are restored will need a place to work, and that's something today's landlords are well aware of.
In fact, landlords' insistence on not discounting rents can be taken as a sign that office buildings may recover sooner rather than later. Recently, the Kastle Back to Work Barometer showed that of the 10 major cities it tracks, eight saw increases in office occupancy rates in late July. If that percentage continues to steadily tick upward, investors in office REITs may have a lot to celebrate by the time 2021 comes to a close.
The Millionacres bottom line
Of course, some office markets may recover at a quicker pace than others. Similarly, some markets may more easily lend to higher rents than others. But on a whole, things do seem to be looking up for the office building sector, and after a brutal 2020, that's something investors should be thankful for.