Office Occupancy – Short Term Uncertainty or “Doom Loop”?

Empty office

For some time now, real estate investors, landlords and tenants have been looking for something…. anything…. to give them direction when it comes to the future of office space.  It seems that lately we’ve entered a new stage of uncertainty and it’s the cataclysmically negative phase.  Don’t get us wrong, many banks and investors are still praying that some combination of declining interest rates, insurance costs, and occupancy will save them from disaster, but the data aggregators and media have let the darkness consume them. 

We have maintained that not only would it be good for companies and governments to return to the office, but that they’ll have to.  With that said, last week, CoStar released the chart below and it definitely gave us pause. 

As believers in the importance of understanding secular trends, the trend line since just after the Global Financial Crisis is alarming and more importantly, it suggests that Covid was an accelerant, not the beginning of something new.  In fact, going back, occupied space per worker was declining 1.4% annually before the pandemic and has accelerated to a 7.5% decline.  That’s a big change and it will affect a lot of office space as it continues.  

Does that mean that we will experience the dreaded central business district “Doom Loop” where tax collections fall, services for the poor fall, and neighborhoods and cities decline into squaller?  Possibly.  And in some cities, probably.  

There is ultimately a secular trend involved here, but the trend, while highly negatively correlated, comes from an improvement in telecommunications, not a decreased need for people to collaborate in person. 

For years, technologies like Citrix and Webex were creeping into use in professional settings.  But when the pandemic hit, not only did we use these, but we put far more resources into improving the solutions.  The result of course was some blend of Blue Jeans, Zoom and Microsoft Teams, and the success of these platforms served as that accelerant.  

We may ultimately settle at a lower level of utilization, but as businesses look toward the future, it is hard to ignore the idea that those workers that are fresh out of school are struggling to be as effective as their predecessors.  For their sake, and for the sake of business efficiency, the retreat from office will have to stall eventually.  It’s tough to be positive now, but if we take the long view, it’s not all doom and gloom. 

Sources: Slate, CoStar


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