The pandemic recovery in the office sector is underway and is projected to reach positive net absorption in the fourth quarter of this year, according to research from NAIOP, the Commercial Real Estate Development Association.
That turning point will be followed by a return to more normal levels, predicts the report titled “Office Space Demand Forecast, Second Quarter 2021,” researched and written by professors Hany Guirguis of Manhattan College and Michael Seiler of William & Mary and the University of Cambridge.
Guirguis and Seiler said they used factors such as GDP growth, corporate profits, employment in the financial sector (because it best reflects changes in office demand), inflation measures, and supplier and manufacturing indexes to reach their conclusions.
Three scenarios, and even the most pessimistic isn’t so grim
They came up with three scenarios for office space absorption, and even the most pessimistic sees positive net absorption from 4Q21 to 1Q23.
“There are two reasons to support our forecast -- first, most economic indicators such as real GDP are moving very close to their pre-pandemic level,” Guirguis told Commercial Property Executive.
“Second, the current recession has been characterized by the fastest decline and recovery in real economic activities. Thus, we should expect the return to positive absorption to happen sooner by the end of the year as forecasted by our models,” the Manhattan College professor said.
Recovery by the millions of square feet
Here’s a nice definition of net absorption, courtesy of the Hanford Freund & Co. real estate glossary: "The net change in physically occupied space between the current measurement period and the last measurement period taking into consideration office space vacated and newly constructed office space in the same area during the same period."
The NAIOP report said COVID-19 concerns about tenant safety created a drag on pandemic recovery in the office sector, resulting in continued declines in net absorption of -26.7 million square feet in 4Q20 and -34.8 million square feet in the first three months of 2021.
They expect that metric to improve to -21.1 million square feet in the second quarter, -12.5 million square feet in 3Q21, and then turn positive to 1.8 million square feet in the final three months of 2021, then back to more typical pre-pandemic levels of over 10 million square feet per quarter from 2Q22 through 1Q23.
How many people will actually go back? That matters
Those predictions are from the middle of the three scenarios. Along with the variables mentioned above, a big question is how many people will actually be called back into offices versus working from home or some hybrid combination.
“Increased adoption of remote work arrangements will likely limit net office space absorption over the next several quarters,” the report said, adding, “Due to population and pricing shifts, the authors expect suburban office space to be in relatively greater demand than CBD (central business district) space in the near term.”
The report notes the popularity of WFH arrangements, something widely recorded and reported, and that shift to the 'burbs also is showing up in other ways, including in homebuilding and preference for short commutes.
And whether in the central city or out in the 'burbs, the NAIOP report adds that the pandemic may lead tenants to space workers farther apart from each other, partially offsetting declines in demand for office space due to increased telecommuting.
The Millionacres bottom line
Our Laura Agadoni presents a primer on net absorption rate here -- "What is the Real Estate Absorption Rate" -- and points out its value in deciding whether it’s a good time to buy, sell, or wait. This NAIOP report adds some insight on how to look at that from a macroeconomic level while you make your own microeconomic decisions about your real estate investments. And, for reading this far, let us reward you with some insight on “2 Office REITs to Buy Now.”