Between 2023-2025, CBRE Econometric Advisors (CBRE EA) forecasts office owners will face a financing gap of $72.7 billion (26.4% of the lending volume originated in 2018-2020). This will likely lead to distress for some property investors and force others to inject more cash into their properties.
The office market has been on its back before. Past experience tells us the preconditions to recovery include a throttling back of the new supply pipeline and painful distress sales that provide necessary price signals.
Ostensibly, office attendance and hotel demand are recovering together but evidence that one causes the other is thin. Certainly, increased hotel demand could boost office attendance as out-of-town senior leaders or vendors fly in for face-to-face meetings, encouraging local workers to venture into the office.
A CBRE analysis of the relationship between gross and net asking rents over time suggests the spread is driven by changes to operating expenses and inflation expectations. Read the latest article to learn more.
Higher inflation could be a boon to properties with near-term lease expirations, resulting in higher-than-expected nominal rent growth. However, stronger rent growth will not necessarily translate into better investment performance.
Tenant preference for the best office properties can be seen in both absorption and rent trends. Since 2018, starting rents across these five CBDs have grown13% at prime buildings versus only 2.5% in non-prime buildings.
CBRE Econometric Advisors believes Class A landlords in markets with abundant new space will have to compete more intensely to secure tenants that may be shrinking their overall footprint due to the rise of remote work.
Changing workplace dynamics, accelerated by the pandemic, are further motivating occupiers to prefer higher-quality assets. Thus, CBRE expects Class A absorption to increase substantially, relative to Class B and C, in the coming quarters.
Most occupiers are still operating under 25% capacity, but our clients believe by the latter half of 2021 they will be back to the office in a more normal way. We expect (in a weighted average number of days) the average U.S. office employee will begin working roughly 3.2 days per week in the office.
The COVID-19 pandemic will permanently alter the workplace. We believe that office workers will spend at least 35% of their week working remotely (RW), resulting in an 9% drop in office demand and 9.5% decline in asking rents if companies immediately recalibrated their space needs.
In partnership with EA’s co-founder, Professor Bill Wheaton from the MIT Center of Real Estate, we developed a new rent series that leverages a repeat rent methodology – the gold standard in economics. We hosted a webinar Thursday, Feb. 25, to dive into this new series and answer some of your questions.
A unique element of EA’s value stream is the management, improvement, and development of rent “price determination models” and the identification and evaluation of those rent inputs and resulting outputs on an ongoing basis. In partnership with EA’s founder, Professor Bill Wheaton from the MIT Center of Real Estate, we developed a new rent series that leverages a repeat rent methodology – the gold standard in economics. With the new methodology for capturing rent movements and a new bottom-up forecasting approach, we have become more flexible in data rendering and more reliable in capturing changes.
It was a tumultuous 2020 and high levels of COVID-19 infections mean that it will be a difficult start to 2021, but economic prospects for the rest of the year are bright. This will provide a much more supportive environment for real estate, but challenges remain.
The U.S. Sum of Markets vacancy rate increased by 100 bps to 14%, marking the highest quarterly vacancy increase in two decades. Space demand shrunk by 30 million sq. ft., marking the second highest decline in demand on the record since 2001. However, the increase in vacancy and decline in demand didn’t lead to substantial rent declines, with the TW Rent Index dropping just -1.6% nationally.
Due to the counterbalancing effects of remote working potentially causing a decline in the need for office space and social distancing requirements potentially increasing office space needs, CBRE forecasts only a modest to moderate decline in office demand in the next five years.
Based on preliminary quarterly results, the vacancy rate for CBRE EA’s Office Sum of Markets increased by 70 basis points (bps) to 13% during the second quarter of 2020, with rate increasing in suburban and downtown submarkets.
The U.S. office sector most likely will not be able to go through the current crisis unscarred. However, 9 of 10 respondents to a BLS survey considered themselves on a temporary layoff, suggesting the unemployment rate may not have a permanent effect on the office sector.
The ongoing pandemic, which reached the U.S. in January-February, didn’t gather enough strength to derail commercial office activity in the first quarter of 2020. Favorable results were in part due to completions of ongoing deals that weren’t put on hold, quarterly data collection methods used, and reasonably optimistic views on the expected duration and severity of the economic slowdown.
Real estate cap rates' decline alongside government interest rates over the past 30 years has buoyed returns, with property values at pace with inflation but property net income falling behind. If cap rates begin to rise, appreciation could vanish.
CBRE recently released the fourth installment in its reporting on corporate real estate (CRE) executives’ priorities, strategies and outlook. Conscious of the risk that continuing change in the economy, labor markets and technology and poses, CRE decision-makers are “future proofing” by improving user experiences and prioritizing agility in their space use.
CBRE's recent survey shows economic uncertainty looming larger among CRE executives' concerns, second only to talent management. Half ranked economic uncertainty a top-three concern, up from last year's one third.
Every economic recession has its unique origins, but it can also usually be characterized by the macroeconomic scenario that sparked it. The three scenarios that typically cause recessions have unique impacts on individual markets and property types and are the key to understanding how your portfolio will weather recessions to come.
Whether it’s a year or eight years away, investors are wondering what the next recession will mean for CRE performance: Will certain markets or asset types be more immune to its negative effects than others? How will markets differ in their speed to recovery?
In a recent study, we examined the effects of a major 2008-type recession on rents and vacancy in the 10 largest U.S. office markets, finding major response differences.