The pandemic has led many to question whether office-space requirements have entered a period of long-run decline due to a growing number of remote workers. Although the office sector faces challenges, including COVID-19’s persistence and new variants, employer attitudes suggest many of their real estate needs will either stay the same or increase over the next few years. Still, this is a fluid situation, and it remains unclear how things will shake out.
Performance lags: Although performance rebounded this year, the FTSE Nareit Equity Office index’s 19.9% return significantly lagged the FTSE Nareit All-Equity REIT index’s 35.1% gain. Longer-term returns have also trailed the overall REIT market.*
REIT index performance
High vacancies: Net absorption** improved in the third quarter, though it remained negative. Looking at individual markets, Houston’s vacancy rate was more than 27%. Other major markets, such as Miami, Washington and Chicago, had vacancies of more than 20%.
Office space net absorption** (millions of square feet)
Incentives grow: Landlords continue to offer relatively high concessions. In the third quarter, tenant improvement allowances averaged $72.80 per square foot, compared with the mid-$50 to low-$60 range from 2017 to 2019. The number of free months on 10-year leases grew to 8.9, vs. six to seven months before the pandemic.
Average tenant concessions
A glimmer of hope? A CBRE Group survey conducted in the spring found that 56% of employers expect their office space needs to grow or remain constant over the next three years. As for office or remote work, 62% predict a balanced approach.
10-year fund performance vs. MSCI EM index
*Returns are through Dec. 15 and are annualized. **Net absorption is the sum of square footage that became occupied less the sum that became vacant during the period.
Sources: National Association of REITs, Bloomberg LP, Jones Lang LaSalle Inc., CBRE Group Inc.