Hybrid working will push US office vacancies 55 per cent above their pre-pandemic levels to a record 1.1bn square feet by 2030, according to a stark industry forecast that attempts to quantify the damage to the commercial property sector wrought by changing work patterns.
The report by commercial real estate adviser Cushman & Wakefield found that 330mn sq ft of office space — roughly equivalent to all the office inventory in the Washington metropolitan area — would be made redundant by hybrid or remote working by the end of the decade. That would come on top of another 740mn sq ft of space that it classified as “normal or natural” vacancy.
Cushman concluded that roughly a quarter of US office space was already undesirable and another 60 per cent was at risk of obsolescence and might require “significant investment” either to upgrade or repurpose it for other uses — a transformation that New York City is now beginning to embrace. While such trends are most acute in North America, they are also evident in Europe and Asia, the company noted.
“Obsolescence is kind of the word of the day right now,” said Andrew McDonald, Cushman’s president, calling the report an acknowledgment of “an inflection point, perhaps”.
The forecast is noteworthy both for the magnitude of the findings and the fact that it was conducted by one of the commercial property sector’s leading players. Like most in the industry, Cushman had, until recently, tended towards a more sanguine view of the long-term impacts of hybrid working.
But Cushman has now accepted that the industry is in the midst of lasting structural changes that are likely to intensify. Thus far, only a third of office leases set to expire between 2020 and 2030 have done so, meaning that landlords could find a growing numbers of tenants trimming space or leaving buildings altogether in the coming years.
While hiring has been robust as the US recovers from the worst of the pandemic and unemployment is once again at historic lows, Kevin Thorpe, Cushman’s chief economist, noted that a longstanding correlation between job growth and companies’ demand for office space had been “fractured”, meaning the post-Covid recovery failed to fill empty offices. Tenants were now seeking less space per worker, though how much less was not clear. “The trend is downward, though the magnitude of the downward shift is still in flux,” Thorpe said.
In a sign of the changing market, Cushman has revived the distressed asset team it created after the 2008 financial crisis to advise clients on troubled buildings and investments. However, McDonald said there was “no evidence of widespread distress” yet and that most of the damage Cushman was seeing was concentrated in specific office buildings.
The company’s findings echo a growing body of commentary from property developers, with many noting how rising interest rates were compounding the challenges of increasing vacancies.
On an earnings call last week, Steven Roth, chief executive of Vornado Realty Trust, acknowledged that hybrid working would not be a passing phenomenon, telling analysts: “I think you can assume that Friday is dead forever . . . Monday is touch and go.”
Roth also acknowledged that in the current environment it would be “almost impossible” to finance the company’s ambitious — and contentious — plan to build a series of office towers around New York’s Penn Station.
Scott Rechler, chief executive of RXR, another leading developer, said earlier this month that the company would have to relinquish some of its office buildings to lenders after determining that they were no longer competitive and could not be easily repurposed.
Like other developers, RXR has increasingly focused its resources on a handful of trophy properties with the most modern amenities and best locations. These are still in high demand among tenants and have become a class unto themselves. In its report, Cushman predicted that only 15 per cent of US office space would fall into this new and highly selective category by 2030.