National economic upheaval and surging unemployment will push U.S. office market absorption into negative territory through the second quarter of next year. That’s according to the NAIOP Research Foundation’s Office Space Demand Forecast for the second quarter.
NAIOP anticipates that the steepest declines could happen in the third quarter, to the tune of about a 16.3 million-square-foot drop. The research does, however, expect that absorption will increase as the economy starts to regain its footing in 2021.
Since various states began to issue stay-at-home orders in March, the pandemic “has markedly altered the U.S. macroeconomic landscape,” the forecast notes. Over that period, nearly 1.8 million COVID-19 diagnoses have been confirmed and more than 100,000 Americans have died.
Authors Hany Guirguis, Ph.D., of Manhattan College, and Timothy Savage, Ph.D., of New York University, cautioned that past information to guide this forecast is sparse and that forecasts of office space demand rely on assumptions about the economy as a whole. Still, they wrote, “The virus’ macroeconomic impact is now quite visible in U.S. data.”
More Permanent Changes?
In the first quarter, the 10-year U.S. Treasury tumbled by more than 120 basis points and market expectations of long-term inflation declined by more than 60 basis points, to nearly 100 basis points under the Federal Reserve’s stated inflation target of 2 percent.
In turn, investors have flocked to the most liquid instruments available. As a result, “the U.S. faces the economics of a liquidity trap, in which investors seek the most liquid assets and traditional interest-rate monetary policy has little or no traction,” the forecast says.
Despite the proven economic benefits of density, COVID-19 could drive a measure of office space “de-densification,” NAIOP suggests.
As various states start to re-open in phases, “employees will arguably put a premium on workplace cleanliness,” according to the forecast. “They will also put a premium on personal space, which may contribute to increased demand for office space.”