The coronavirus pandemic has changed the way Americans work -- perhaps on a permanent basis. Now that many employees have been doing their jobs from home, remote work could become a permanent fixture in the corporate world.
That would be a very bad thing for office REITs (real estate investment trusts). Many of these REITs saw their value decline as the pandemic drove people away from offices and made companies hesitant to re-up existing leases.
Earlier this summer, things seemed to be looking up for REITs, as many large companies started announcing plans to bring workers back to the office. But then the Delta variant took hold, and now, employers everywhere are rethinking those plans. In fact, because of the recent surge in COVID-19 cases, there's a good chance many workers won't be looking at returning to an office until 2022. And that could hinder office building recoveries in a number of markets.
When we think about the office markets that have really been hit hard by this set of circumstances, it's easy to land on cities like New York City and San Francisco. But Seattle is another large market where office building vacancies continue to abound.
Seattle's offices remain sluggish
Seattle was banking on a number of big-name companies bringing workers back to the office sooner rather than later. But now, a number of larger employers in the area, like Google and Apple, are delaying their reopening plans due to the Delta variant. And that's apt to hurt office REITs that own a lot of Seattle properties.
During the last quarter of 2019, the vacancy rate among Seattle's office buildings was 6.7%, according to CoStar data provided by commercial real estate firm Kidder Mathews. By the first quarter of 2021, it had reached 13.3%. And by the end of 2021's second quarter, it had climbed to 14.9%.
It's estimated that 40,000 office employees are showing up to offices regularly in downtown Seattle, according to Placer.ai data. But that's a drop in the bucket compared to the 170,000 employees who did so before the pandemic began. And when we account for current vacancies, upcoming vacancies, and subleases, almost 20% of Seattle's downtown office space was available for rent as of the end of June, according to real estate firm Savills.
Now the good news is that local brokers are reporting that office building tours are picking up and tenants are looking at space in the area. But those interested parties may still opt to delay lease signings until the current COVID-19 surge calms down. That said, office plans can take months to arrange, so employers who are set on having a presence in Seattle may opt to sign leases sooner.
All told, it's a tough time to own and operate office REITs. Real estate investors may need to sit tight and ride out the current wave of sluggishness on the office-building front. Once things improve with regard to the COVID-19 outbreak, leasing activity and office returns should pick up in most markets, Seattle included. But it may take a while until we reach that point.