Much has been said about the potential exodus from cities in the wake of the current pandemic. As workers in central business districts shy away from crowded subway cars and appeal for more work-from-home capability, will we see a major shift toward more suburban office developments? Revathi Greenwood, Global Head of Data and Insights, Cushman & Wakefield, and Brian Lindenberg, Vice President, Black Creek Group, shared their respective positions on this so-called phenomenon and its far-reaching implications at NAIOP’s Officecast.
Greenwood started the conversation by talking about the U.S. recovery. “Depending on how soon the [COVID-19] vaccine can be rolled out and how effective it is, we see a few difference scenarios,” she said. The upside scenario would see the U.S. returning to its 2019 GDP levels by 2021 Q2; the downside scenario would have U.S. GDP at 2019 levels by 2023 Q1. In light of recent positive vaccine developments and therapies, including Pfizer’s announcement yesterday, Greenwood said, “We are tending towards a more optimistic side of things.”
Consumer confidence is also on the upswing; after ebbs and flows and a low point in July, that major indicator seems to be improving.
Pre-COVID, Greenwood said Cushman & Wakefield’s data had overall office vacancy levels at about 13%, and that the company expects it could increase to around 17%, but return to pre-COVID levels in 2024.
As a share of all office occupancy, suburban submarkets increased from 64% in 2005 to 68% in 2020. The past two years have seen better leasing performance – stronger absorption, faster vacancy decline and stronger rent growth – in those suburban submarkets. In 2019, 69% of Class A net absorption occurred in the suburbs, up from the 10-year average of 60%.
“We think of this as a COVID phenomenon, but it’s been happening a long time before that,” Greenwood said. Population growth has leaned towards the suburbs for some time now; data show annual growth rates have been stronger in the suburbs for second half of last decade. Over half (52%) of U.S. office workers live in suburban neighborhoods, while only 27% are in urban environments. The remaining 21% are in rural communities.
Greenwood shared the 10 most active suburban markets by total net absorption of suburban office space from Q1 2018-Q3 2020: Northern Virginia, Phoenix, San Mateo County, San Jose, Atlanta, Salt Lake City, Baltimore, Denver, Sacramento and Charlotte.
In the Black Creek Group portfolio, there is definitely a shift to more suburban product, Lindenberg said. “High quality, well-located suburban assets do well because of the hub-and-spoke model.”
Greenwood agreed: the CBD vs. suburban rent differential remains well above historical norms, which makes hub-and-spoke or co-location expansion strategies attractive for employees’ commutes and companies’ pocketbooks.
Greenwood said it’s important to distinguish between temporarily working from home (employees who are tied to a physical office with flexibility to work from home some of the time) or permanently working from home (employees are not tied to any real office space and can work from anywhere). Greenwood sees the permanent work-from-home group increasing from roughly 5% to 10% nationwide in the wake of the pandemic.
Lindenberg added: “I think the lasting impacts we’ll see include more focus on health and wellness. We’ll see more rotation vs. requirement for employees to be in an office.”
And when will CBDs return to pre-pandemic levels? “That’s the million-dollar question,” Greenwood said, and settled on 2-3 years as her best guess, considering how long it took people to return to skyscrapers after 9/11.
Lindenberg agreed. “We all talked about ‘the death of the skyscraper.’ Ten years later, downtown Manhattan was thriving.”
In the future, the office will exist in a total workplace ecosystem, comprised of a variety of locations and experiences to support convenience, functionality and wellbeing, said Greenwood.
Office space will take into account peak requirements, not average capacity – and that might mean companies start to incorporate flexible space. Most organizations will continue to have days with all or most employees in the office.
Custom solutions will provide the right balance. Experiences differ based upon job functions, demographics, industries and psychographics, so an effective real estate strategy will to take all of that into account.
This post is brought to you by Marcus & Millichap, sponsor of NAIOP’s Officecast 2020. Learn more about Marcus & Millichap at www.marcusmillichap.com.