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Office Buildings May Not Recover Until Late 2022

Sep 08, 2020 by Maurie Backman
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It's no secret that the coronavirus pandemic has changed the way people do their jobs. Companies that once frowned on work-from-home arrangements are now having their staff work remotely during the ongoing crisis, and some are making plans to do so well into the coming year.

All of this has made office space less desirable -- and that may not change anytime soon. In fact, the U.S. office market is unlikely to recover from its current sluggish state until late 2022 at the earliest, according to a recent analysis by Cushman & Wakefield (NYSE: CWK).

Specifically, the office vacancy rate is expected to reach 18% by mid 2022. That rate stood at 13% coming into 2020, though it was lower in high-profile markets like New York. But given current and anticipated limited demand for office space, rents are likely to drop nationally by 10% to 15% between now and mid 2022. That's good news for businesses looking to renegotiate their leases or trim their expenses, but for commercial landlords, not so much.

Have office buildings fallen out of favor?

Right now, some companies are keeping employees home out of necessity. But others are finding that remote work may be a viable long-term arrangement and a cost-saving one at that. Now that many employees are set up to do their jobs from home and have adjusted to the technological hiccups that may have reared their ugly head earlier on in the pandemic, commercial tenants may start to realize that bringing back their staff in full is highly unnecessary. As such, many will likely seek to downsize their office space in the coming year, which explains why office buildings may be in for a rough ride.

But that love affair with remote work may only last so long. While companies have adjusted fairly well to remote employment, they may grow tired of it once the pandemic ends and in-person collaboration no longer constitutes a major health hazard. And workers, too, may grow tired of doing their jobs at home, in quasi-isolation. As such, it's likely that office buildings will stage a comeback -- it just may not happen for a while.

Riding out the storm

Cushman & Wakefield predicts that the demand for office space will pick up during the second half of 2022, and that at that point, vacancy rates will start to drop. But commercial landlords will need to prepare to make concessions in the interim. These could include offering new tenants several months' worth of free rent, lowering rent prices, or throwing in additional amenities, like deep cleanings, that may not be part of their standard lease agreements. All of these moves will serve the very important purpose of maintaining steady cash flow at a time when vacancies may be spiking.

Office buildings have long been a mainstay in the world of commercial real estate, and they're likely to remain a solid long-term investment. But chances are, it will take a good couple of years for office space demand to increase, and investors will need to remain very flexible until that happens.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.