When news of the coronavirus outbreak first emerged, many employers were quick to shift their staff to remote work, and many employees were quick to oblige. At the time, those arrangements were thought to be temporary inconveniences.
Fast-forward 12 months, and at this point, a large number of companies are continuing to have staff work from home -- at least until coronavirus vaccines become more widely available and it's safer to have employees congregate under the same roof. Furthermore, now that so many employers are used to the remote work setup, many are rethinking their office space needs.
The result? A number of markets that once dominated the office space field are grappling with record vacancies, and rents are getting slashed in an effort to encourage tenants to sign leases.
Not only that, but some companies are making plans to abandon pricey real estate markets and move to cheaper locales where square footage comes at less of a premium price.
It's this very trend that's already hurting office buildings in New York City, and investors may fear it'll extend to California. But recent data shows that California continues to dominate on the office space front, and rents in some of its most prominent markets are still holding strong.
California office space remains expensive
Despite the impact the pandemic has had on office space demand, a number of California markets are still booming. According to a recent national office report released by CommercialEdge, 7 of the 10 priciest U.S. office markets were located in California.
Menlo Park in San Francisco ranked first, with average asking rents coming in at $109.57 per square foot in 2020's fourth quarter. Palo Alto, meanwhile, came in fourth, with an average rent of $92.90 per square foot.
Positions six through 10 on the list were all California-based as well:
- Redwood City: $85.98 per square foot
- Presidio Heights: $85.05 per square foot
- SOMA: $82.66 per square foot
- Los Gatos: $82.26 per square foot
- San Francisco's South Financial District: $81.17 per square foot
Furthermore, submarkets in San Francisco represented 14 of California's 29 entries in the top 50 office markets.
Now interestingly, Manhattan did manage to retain three spots in the top 10 -- the Plaza District, SoHo, and Times Square/Hell's Kitchen. And New York City was fairly well-represented throughout the top 50 office markets.
But still, investing in California or Manhattan office buildings may be a risky endeavor these days, what with the potential for many companies to make remote work a permanent fixture. Furthermore, a lot of people have migrated out of cities during the pandemic, so we could see a boom in office space demand in smaller cities -- ones that haven't cracked the top 50.
The Millionacres bottom line
The good news is that office buildings aren't doomed completely. While some companies may uphold the remote work setup beyond the pandemic, many will likely shift to hybrid models where employees come to the office part of the time, and some will likely return to a full-fledged in-person model once it's safe.
But investing in ultra-pricey markets right now is still a gamble, and until we see more data emerge following the pandemic, those looking at office REITs, or real estate investment trusts, may want to choose their target markets very carefully.