Absorption in the U.S. office sector will remain negative through early 2021, according to the NAIOP Research Foundation’s latest Office Space Demand Forecast. But an about-face beginning in the second quarter of 2021 will lead to overall net gains by the third quarter of 2022.
A pandemic-induced recession is a different beast for the modern-day office sector, rendering predictions a complicated business.
“The unique ways that COVID-19 may affect demand for office space are difficult to forecast in a predictive model. Nonetheless, recent trends in office absorption suggest that office sector performance will continue to reflect economic conditions, as in past economic cycles,” according to the NAIOP forecast.
While multiyear leases and the shift to remote work have helped mitigate damage to the office sector, the association expects that the dampening impact of ongoing economic challenges will persist, resulting in anticipated negative net absorption of 18 million square feet in the fourth quarter of 2020.
The unfavorable numbers will continue into the first quarter of 2021, but to a lesser degree, with negative absorption totaling an estimated 10 million square feet. Contraction of office net absorption during the current recession will likely be more severe than that seen during the 2008 Great Recession, NAIOP predicts, pointing to information from CBRE.
According to CBRE’s figures, office net absorption, which was slowing well in advance of the arrival of the coronavirus in the U.S., contracted by a total of 50.7 million square feet in the first three quarters of 2020.
NAIOP anticipates that the downturn in office absorption will end in the second quarter of 2021, with the revival of growth in net absorption continuing to the third quarter of 2022, at which point positive absorption will have exceeded the negative absorption seen in this cycle. Still, there are the unknowns, or the X factors, that could further affect office demand, including the recent advances in the development of a COVID-19 vaccine.
“The news of the COVID-19 vaccine will positively impact the office sector, however, we do not expect the impact to be instantaneous as the number of COVID-19 cases increases throughout the country,” Dr. Hany Guirguis, co-author of the NAIOP report & professor of economics and finance at Manhattan College’s O’Malley School of Business, told Commercial Property Executive. “Also, there are still some suspicions regarding the effectiveness of the vaccine. Thus, we should expect consciously and moderately delayed improvements in the office sector.”
Looking further into the future to a post-pandemic climate, the issue of remote work and its potential to continue as a permanent and prominent aspect of work life could also impact office demand forecasts.
“Remote work has proven to be effective in some areas. The convenience and the cost savings in these areas could create some structure changes and a permanent decline in office demand,” Guirguis said. “However, it is difficult to quantify these changes at the current stage.”
Read the full report by NAIOP.