COVID Flare-ups Weigh on Office Sector
This week’s data suggests that the COVID-19 flare-up in the U.S. has slowed but not derailed the economic recovery. Big cities, particularly the downtown areas, continue to struggle because of workers’ apprehension about using mass transit and companies’ reluctance to reopen their offices. This has been a drag on the office sector but, due to the accelerated growth of the digital economy, has not held back the resumption of some business activity, particularly sales of consumer goods and homes.
One emerging bright spot is housing. Super-low mortgage rates have driven pending home sales to a decade high. An uptick in new home construction, which has been weak since the Global Financial Crisis, is likely to follow.
Retail sales are also back to their pre-COVID levels, no doubt benefiting from consumer frustration at not being able to travel or dine out as much as before. Business confidence has also bounced back sharply—not to pre-COVID levels but enough to suggest that a cautious uptick in business activity is underway. The expiration of enhanced unemployment benefits will hit some families hard and lead to a further easing of the recovery. However, we think further stimulus is on the way, including enhanced support for the jobless. Spotlight on Office Market
Disruption Presents Opportunities
The COVID-19 crisis has made the marketplace reevaluate the value of long-term office leases. Reduced economic activity has caused difficulty for some tenants to pay their office rent, and some have tried to invoke “force majeure” clauses and obscure lease concepts like “impossibility of performance.”
Debt capital market conditions for office mortgages have notably weakened with rising uncertainty over whether occupiers will continue remote-working arrangements permanently, lessening the need for long-term office leases.
Some believe occupiers will adopt a hub-and-spoke model, in which companies maintain smaller headquarters and add several outlying locations that give their employees options for where to work most productively. CBRE detailed this approach in its recent thought-leadership piece titled “The Role of Great Offices in the Future of Work.” The flexible office market also stands to gain from these challenges. For more detail on this, flex office provider Hana (a CBRE subsidiary) recently published a white paper titled "COVID-19 Drives Demand for Flexibility and More Meaningful Office Connections.”
The key to the long-term viability of flex, coworking and traditional office space is enabling maximum productivity for the company and the employee, while not diminishing the capital markets value of assets and their ability to attract financing. An agile or “choice” model does all of these. Traditional office value is maintained, particularly in large cities where most headquarters are located. Occupiers benefit by mixing their office portfolios with longer-term leases in major markets and shorter-term flexible leases in satellite locations. And employees benefit the most by gaining flexibility in their work arrangements, leading to optimal live-work-play balance that improves their overall productivity.