Hybrid work will push US office vacancies 55 percent above pre-pandemic levels to a record 1.1bn square feet by 2030, according to realistic industry forecasts that attempt to quantify the damage to the commercial property sector wrought by changing work patterns.
A report by commercial real estate advisor Cushman & Wakefield found that 330m² of office space – roughly equivalent to the entire office inventory in the Washington metropolitan area – will be hybrid or remote working by the end of the decade. That will come on top of another 740mn sq ft of space classified as “normal or natural” vacancy.
Cushman concluded that about a quarter of US office space is no longer desirable and another 60 percent is at risk of obsolescence and may require “significant investment” to upgrade or reuse it for other uses – a transformation that has now begun in New York City. hug. While the trend is most acute in North America, it is also visible in Europe and Asia, the company noted.
“Obsolescence is the word today,” said Andrew McDonald, president of Cushman, calling the report “an inflection point, perhaps”.
The forecast is very important for the magnitude of the findings and the fact that one of the main players in the commercial property sector. Like most in the industry, Cushman has, until recently, tended to take a more sanguine view of the long-term impact of hybrid work.
But Cushman has now accepted that the industry is in the midst of permanent structural changes that are likely to intensify. So far, only a third of office leases due to expire between 2020 and 2030 have been completed, meaning landlords could find many tenants cutting space or leaving buildings entirely in the years to come.
While hiring has been strong as the US recovers from the worst pandemic in history and unemployment is back on track, Kevin Thorpe, Cushman’s chief economist, noted that the long-standing correlation between job growth and corporate demand for office space has “broken.”, meaning the post-recovery -Covid has failed to fill vacant offices. Tenants are now looking for less space per worker, although less clearly. “The downward trend, although the magnitude of the downward change is still in flux,” said Thorpe.
In a sign of the changing market, Cushman has revived the distressed asset team created after the 2008 financial crisis to advise clients on building problems and investments. However, McDonald said there was “no evidence of widespread distress” and that most of the damage Cushman saw was concentrated in certain office buildings.
The company’s findings echoed many comments from property developers, with many noting how rising interest rates have increased the challenge of increasing vacancies.
In an earnings call last week, Steven Roth, chief executive of Vornado Realty Trust, acknowledged that hybrid working won’t be a passing phenomenon, telling analysts: “I think you can assume that Friday is dead forever . . . Monday is touch and go.” .”
Roth also acknowledged that in the current environment it would be “almost impossible” to finance the company’s ambitious — and controversial — plan to build a series of office towers around New York’s Penn Station.
Scott Rechler, chief executive of RXR, another prominent developer, said earlier this month that the company had to surrender several office buildings to lenders after determining they were no longer competitive and could no longer be easily used.
Like other developers, RXR is focusing its resources on several trophy properties with the most modern amenities and the best locations. It is still in demand among renters and has become a class unto itself. In its report, Cushman predicts that only 15 percent of US office space will fall into this new and selective category by 2030.