It's “too early to write the epitaph” for office real estate, UBS analyst says


    As the heads of major companies like Morgan Stanley and Berkshire Hathaway tout the viability of their employees working from home for the long term – or even “forever,” as Twitter CEO Jack Dorsey told his employees this week –the future of a post-coronavirus office market seems suddenly in jeopardy.

    But like other major events to hit the U.S. office market, such as the 9-11 terrorist attacks, Hurricane Harvey and Superstorm Sandy, some say it will recover fully from this over time, albeit slightly changed.

    More offices may move from higher density downtowns to the suburbs, as jobs move closer to where employees live. Companies may also seek more space, not less, as they reconfigure to accommodate for social distancing. Newer, more environmentally sustainable buildings could see increased demand and pricing power while older, lower quality buildings could face lower demand and significant capital and leasing costs, all according to a new report from UBS.

    “We believe it is too early to write the epitaph for the entire office sector as there are a number of counterbalancing forces at work,” said Jonathan Woloshin, real estate and lodging analyst for UBS. “However, the realities are that landlords, companies and tenants alike will all be forced to improvise, adapt and overcome a number of challenges in the post COVID-19 world.”

    That adaptation will include touchless technology, face coverings, and social distancing standards. About half of 203 company operations globally, surveyed by CBRE, said they will be implementing some or all of these. Just one in five said they intend to reopen as soon as government restrictions are lifted. More, about 42%, said they will do so after their internal standards are met.

    “I think there may be one other shift, which is more flex-working altogether. That would include some measure of co-working,” said Spencer Levy, senior economic advisor for CBRE. “I do see some benefits to suburban in the short-term, but in the long term I do see people reverting to the urban core.”

    In a new forecast, CBRE predicts that after hitting $35.66 per square foot per year in the first quarter of 2020, the average office rent will hit a low of $33.23 in the fourth quarter and then gradually recover back to current levels by the first quarter of 2022. The average vacancy was at 12.3% in the first quarter of 2020. CBRE sees that rising to a high of 14.9% by first quarter of 2021, then gradually recovering to current levels the following year.

    Most companies, 72% according to CBRE, will do a phased reopening of their offices. Just about half said they expect to give employees the option to work from home for the foreseeable future. This of course would vary widely depending on the sector and type of work being done, as not all work can be done efficiently remotely.

    “I think you’ll see many employees that will continue to work from home, you’ll have many that will get back to the office and then you’ll have some that’ll do a little bit of both,” Cisco Systems CEO Chuck Robbins said on CNBC’s Mad Money with Jim Cramer.

    The recent trend in coworking, which is a super-social model of employees working in common areas using shared amenities, may have a hard time recovering. So-called ‘flexible office’ companies, however, which rent private offices and conference rooms, are already seeing higher growth. 

    “The ability to access office space on-demand is a huge advantage,” said Bryan Murphy, CEO of Breather, a flexible office company that serves some of the largest urban markets in the U.S. and globally. “Office is not dead. Companies are just realizing they need less office than they did before.” 

    Murphy said April was very quiet, but he is now seeing demand up about 35%, with employers who have not yet opened their main offices seeking temporary facilities. 

    “You’d be crazy to sign a long-term lease with this much uncertainty going on. Those are the calls we’re getting,” added Murphy.

    As regular offices do open though, one newer, supposedly more efficient and cost-effective element of the space could disappear — that is, so-called ‘hot desking’ or ‘hotel desking.’ This is where employees do not have assigned desks, but instead share workstations in open seating areas. 

    “In a post COVID-19 world there may be a reluctance on the part of employees to utilize a space when they are unsure of the hygiene of the previous user and how thoroughly it has been cleaned,” said Woloshin, who also pointed out that retrofitting offices for automatic fixtures and doors, as well as  reconfiguring conference and common area spaces for social distancing could be very time-consuming and expensive.

    “Should this prove to be the case, remote work policies could be in place significantly longer than when certain cities begin to ‘normalize.'”