Impacts on Office

As the new year kicked off in the U.S., the collective view on 2020 was optimistic. Another year of growth in office rents and property values were expected to continue as tenant demand exceeded supply. Construction across the U.S. was firing on all cylinders and investor confidence remained high. During the first two months of the year, activity was strong and deal volume echoed the same momentum measured in 2019 as both domestic and international capital chased attractive U.S. real estate assets. As March arrived , implications of the continued spread of COVID-19 began to settle in on the U.S. office market. One after another, state and local governments issued orders that shuttered all nonessential businesses and sent employees home.

Since mid-March, new leasing has been spotty within the office sector and the markets have remained at a relative standstill. Touring of space was deemed as nonessential in most markets and the negotiation of terms typically moving throughout the marketplace also ceased. Deals with ink drying months earlier that bear commencement dates in April and May, wreak havoc on move in and move out logistics for many as local government restrictions prohibit tenants from fulfilling these obligations.

Although, some new and renewal transactions continue to close, the same number are equally being put on hold. Tenants are reluctant to sign any new commitment as the economic forecast remains cloudy. On the heels of a nearly 12-year bull market, many believe this to be the top of a market and anticipate a correction that may result in reduced rates. Over the last month and a half, landlords continue to express confidence in the market rebounding and a reluctance to lower rental rates amid tenant expectations.

As April 1st was approaching, the biggest priority and concern of most office tenants was their payment of rent (in April and beyond) as economic conditions began and were anticipated to continue to worsen into the foreseeable future, due to COVID-19 related factors. Conditions in the retail sector were clearer – COVID-19 had virtually halted all retail activity throughout the nation and retail landlords were expecting to have to work with tenants who couldn’t meet their rent obligation. The office market however, was not as clear. Office landlords have been receiving a range of requests for concessions on rents, deferred payment or complete forgiveness. These requests are typically dealt with on a case by case basis, and those with stronger credit tenants in their portfolios are faring better than those without. Many tenants are being required to show clear proof that their businesses were, and continue to be, impacted by COVID-19 for landlords to consider rent relief negotiations.

Remote working, which previously was only widely adopted by a handful of tech firms, is likely to endure to some degree post crisis. As a result, the decrease in office space utilization may be offset in part from the need to implement distancing measures within the workplace as employees return to the workplace at full capacity; refuting the need for tenants to reduce their footprint as a result.

It is likely that occupation densities will be reduced only temporarily, initially by companies managing seating policy within their organization and employee behavior rather than the more expensive desk reconfiguration alternative as many tenants struggle with hits to their bottom line. Video calls and conferencing will continue to replace many meetings and most business travel for the near term. The days of planning for extremely high-density workplace settings are however, expected to change in the foreseeable future.

Working remote seems only a viable option for a small percentage of employees and operational functions long term so tenants will look to longer term solutions in their workplace strategies as we transition back to the office.

As we move into the spring it is yet to be seen the full impact of COVID-19 on the U.S. economy and the office market. A slowing in deal volume is likely to persist as local and state governments tread new ground and consider strategies to reopen cities and businesses. Although demand will be tempered, it is likely to stabilize as we return to a new normal. Landlords in most healthy markets note that many of the transactions that have been put on hold are expected to be revived, and although many may change, are expected to move forward as conditions improve and become clearer. Landlords as of April and May remain confident in a recovery.