Negative Office Absorption in Our Future

December 23, 2020

We now believe the national office market will likely have negative absorption for 2020 and, depending on how long the pandemic lasts, into 2021.  Globe Street has a nice overview in the article below my comments.  Here are some of my thoughts on the office sector looking forward into the next year.

Why negative absorption nationally?

–We were already at the end of a long growth period (over a decade) and ready for a correction.

–The Biden administration has campaigned on additional regulations and higher taxes which would slow growth.

–Tech companies have been going remote (for now) and it will be hard to get employees back to the cities as they move out.

–Many companies are already incorporating hybrid models (a mixture of office space and work from home), which of course require less office space.

In Metro Phoenix, we will be a mixed bag.

–We will continue to land companies from CA but fewer now.  We were grabbing California companies by the droves.

— Arizona passed Prop 208 which is a massive tax increase.  This is going to really hurt the competition for inbound companies.  We will have to see how many prospects we lose to Texas, Nevada, or Utah now that we will be considered a high tax state. Local business owners have already started challenging the legality of the proposition. You can read more about that here.

–Currently, we have a balanced market and so we might see some negative absorption but we don’t think we will go to 20% vacancy or much above our current 17% vacancy.

–We have seen almost 700,000 SF of sublease space put on the metro market in the last 90 days.

May we live in interesting times.  Give me a call if you want to discuss.

Craig
602.954.3762
ccoppola@leearizona.com



Negative Office Absorption Will Be Worse Than In the Great Recession

By Les Shaver

November 19, 2020

Office landlords will continue to hemorrhage space over the next couple of quarters. 

NAIOP expects office net absorption to be negative 18 million square feet in Q4 2020 and negative 10 million square feet in Q1 2021, a downgrade from its prior office demand forecast. Already, office net absorption contracted 50.7 million square feet in the first three quarters of 2020, according to CBRE. 

Add the 50.7 million square feet contracted already with 28 million expected to be lost in Q4 and Q1 and the office market could be looking at a contraction that is more severe than the one experienced during the global financial crisis of 2008, according to NAIOP.

Fortunately, things could turn around soon after that. NAIOP expected growth in net absorption to resume in Q2 2021. Overall, it expects the total net absorption from Q2 2021 to Q3 2022 to exceed negative absorption from the recession. That would result in absorption gains over the entire forecast cycle. 

NAIOP’s forecast assumes a continued rebound in real GDP for the remainder of 2020 and that real GDP will expand by 4% in 2021 and 3% in 2022. It also assumes that average unemployment during 2021 and 2022 will be approximately 5.5% and 4.5%, respectively, and that inflation will be 1.75% in both years.

Cushman & Wakefield also sees contraction going beyond Great Recession levels. It has determined that office demand will decrease 30% more during the pandemic than during the 2008 Great Financial Crisis. 

In its baseline scenario, which has a 50% probability, CBRE projects the US office market will shed 145 million square feet of office space in the next two years, through the end of 2021. Job loss is the driving force behind the US office market’s degeneration, with the report anticipating a loss of 1.7 million jobs in 2020. This is an improvement compared to the 2.6 million jobs lost in the second quarter.

Even though NAIOP projects a recovery in the office market, the landscape could look very different. The future of office use will likely be a combination of a downtown headquarters, coupled with suburban hubs, flex space and remote working.

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