When the coronavirus outbreak first erupted, workers all over the country were told to pack up their desks and do their jobs remotely for what ended up being an extended period of time. And even now, many office markets are still grappling with sky-high vacancy rates.
That's bad news for office REITs, or real estate investment trusts. Not only have office buildings been sitting vacant, but tenants have been hesitant to resign leases given the uncertainty that abounds. Plus, the delta variant is threatening office reopening plans, and some companies haven't yet gotten a handle on their office space needs as they try out hybrid models that include having workers do their jobs from home part of the week and in person for the rest of it.
But while many office markets are still sluggish, downtown Minneapolis is beginning to show signs of life. And that's great news for REITs with properties in the area -- and the people who invest in them.
A much-needed revival
To be clear, things aren't yet back to normal in Minneapolis. But many major employers are planning to bring workers back to the office right after Labor Day, which could kick-start an important trend.
Of course, if we look at the data, things don't seem great for Minneapolis' central business district, which posted a 23.6% vacancy rate during the first quarter of the year, according to Cushman & Wakefield. That's up from 19.9% for the same period a year ago and represents the highest vacancy rate the firm has recorded for the Twin Cities' office market.
But some real estate experts in the area aren't worried about those data points, especially since there are signs that workers are already returning to office buildings at a faster pace than expected. Normally, leasing activity for office buildings is slow during the summer. But JLL reports that has not been the case this summer in Minneapolis. In fact, office-building tours picked up in June, which could lead to a string of new leases for the fall.
Furthermore, the Minneapolis Downtown Council has estimated that 32.3% of workers were back in the downtown area's major office towers as of early July. That's an increase from 16% in January.
Will companies seek to downsize office space?
Now one question that does remain is whether office-building tenants will seek out smaller spaces or not. In an age of hybrid work, many companies may not need the same amount of square footage they once did. That's a question employers may not be able to answer right away as they see how things play out once workers return to offices at a more rapid clip.
But even if companies do seek to shrink their office space, those reductions may not end up being so severe. In fact, in a workplace survey conducted by Colliers, most Minneapolis companies are thinking of slashing their square footage by about 10% -- not 30% or more as some office building investors were worried about. And that trend may reverse in the coming years, depending on how well (or not) hybrid employment arrangements end up working out.
All told, things aren't looking so bad in Minneapolis right now. And as more workers return to office buildings, REIT investors may find themselves increasingly reassured that things are slowly but surely getting back to normal.