Notably bruised by the pandemic, the office sector is on track to record positive net absorption in the fourth quarter of 2021, according to NAIOP’s latest Office Space Demand Forecast.
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Good news is afoot in the market, as employees return to the workplace amid increased vaccine distribution and the lifting of pandemic restrictions.
As noted in the report, the U.S. economy is in the midst of a healthy rebound from the COVID-19-induced recession, and this economic growth has translated into gains in employment in office-using industries. NAIOP’s forecast, co-authored by Dr. Hany Guirguis of Manhattan College’s O’Malley School of Business and Dr. Michael Seiler of William & Mary and the University of Cambridge, centers on the assumption that the rebound in real GDP will persist through 2023.
“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 good, the bad and the baseline
NAIOP has outlined three potential scenarios for the office market, all of which predict office net absorption’s return to normalcy by the second half of 2022. The organization’s baseline forecast assumes that the recession’s effect on office absorption will be limited, but remote work’s impact will result in a 15 percent decrease in what absorption would normally be, resulting in quarterly average net absorption of 10.04 million square feet from the fourth quarter of 2021 to the first quarter of 2023. A second, more optimistic scenario assumes the same restrained impact from the recession, but no decrease in absorption due to remote work, which would give rise to quarterly average net absorption of 11.82 million square feet from the fourth quarter of 2021 to the first quarter of 2023.
There is, however, the possibility that the recession and the pandemic have had a temporary effect on how net absorption reacts to economic fundamentals, which is the premise of NAIOP’s third scenario. In this case, the office sector would experience substantial fluctuations and considerably lower net absorption—specifically, a forecasted quarterly average net absorption of 1.33 million square feet from the fourth quarter of 2021 to the first quarter of 2023.
Next year is the year
Back to the baseline, it appears 2022 will be a turning point for the office sector. NAIOP predicts quarterly net absorption will average 11.7 million square feet in 2022, a figure that is consistent with the quarterly average of 11.6 million square feet recorded between 2015 and 2019. And not even new office product will throw off the progress. When asked if strengthening office demand will be enough to accommodate new office construction and redevelopment projects, Guirguis responded with a resounding “yes.” He added, “The new office construction, however, will not happen simultaneously with the strengthening of office demand. This might take a few quarters.”
Read the full report by NAIOP.