U.S. Urban Office Market, Stung By Pandemic, Hopes Tech Firms Drive Comeback

U.S. Urban Office Market, Stung By Pandemic, Hopes Tech Firms Drive Comeback

Via Reuters:

The growing footprint in New York of major tech companies like Amazon.com Inc, Facebook Inc and Alphabet Inc’s Google has given property owners and brokers hope that once the coronavirus has been conquered demand for office space will quickly return to pre-pandemic levels.

But the popularity of working from home and the exodus of people from expensive coastal cities will likely weigh on demand and change workspace requirements, leaving office buildings that do not adjust less valuable.

Big Tech’s expanding real estate clout already hides declining values for lower-quality properties.

Prices for premier workspace in U.S. gateway cities have held or even risen during the pandemic in a flight to quality. But leasing volumes and number of buildings sold have plummeted, with valuations at the lower end falling, data shows.

The pandemic has left a massive question mark hanging over the office sector, said Joe Gorin, head of U.S. real estate management and value-added investing at Barings in New York.

“I know how people are going to use the hotel coming out of the pandemic. How are people going to use office buildings?” he asked. “There’s going to be some pain because we’re going to have to go through a restructuring of how people use space.”

Companies need to make the office more compelling and allow busy work to be done at home, which means workspace demand might not grow, Gorin said. Buildings that cannot provide a great environment will become obsolete.

“If you can own or create the right stuff, it’s going to be valuable,” he said. “Office can become more important and shrink as much as it can expand.”

 

Limited data suggests buildings classified below the top Class A industry designation already have suffered a drop in value during the pandemic and could be poised for a further slide if a decline in demand persists.

The amount of available office space has soared as tech companies have dumped excessive workspace, a sign of uncertainty among management about a company’s future workspace needs.

Institutional investors have put transaction decisions on hold, with the sale of buildings in Manhattan valued at more than $100 million falling more than half to just 32 last year, research by brokerage Newmark Group Inc shows, using Real Capital Analytics data.

Leasing activity has picked up after the New Year but is still far below pre-pandemic levels.

The office sector is the hardest in commercial real estate to assess because leases generally are long-term commitments, said Sam Isaacson, president of Walker & Dunlop Investment Partners in Denver.

“Eventually the cash flow streams have to match up with the asset value appreciation and when that doesn’t occur, that’s when we’re going to see some real pain,” Isaacson said.