The combination of COVID-19 and densely populated cities has not been good for quality of life, nor for business. Cites like New York and San Francisco are seeing a mass exodus of its citizens and companies away from their Central Business Districts (CBDs) to the suburbs, or, they leave the state all together for less-pack destinations cities like Miami, Palm Beach, Atlanta & Austin, which also happen to have attractive tax structures for businesses and citizens.
Writers at The Economist seem not too worried, citing that cities like New York have weathered such crisis’s before. But recovery will most likely be slow and painful. All city governments, regardless of density, have had to make budget cuts, with more most likely coming. All of this of course will impact city services. Some services will have to be drastically reduced and other paused or entirely eliminated – all future projects put on hold.
So is Office Real Estate a Good Investment right Now?
Offices, the dominant real estate asset class in CBDs, are stuck in this weird sort of cryo-sleep transaction-wise. Of the transactions that are taking place, most are renegotiation of existing leases for more favorable or shorter terms, or, it’s a down size play. It was reported earlier in the year that the 2 most effected Office-sized categories would be units that were 50,0000SF+ and 3000SF and under. So while many small businesses in the <3330SF category vacate their offices entirely, the overall downsizing pressure of COVID-19 has still been kind to the smaller units. It’s the 50,0000SF+ spaces that have been hit hardest.
The Pessimistic Perspective
In South Florida, vacancy for Office assets has risen to 11% and net absorption continues to decline. It’s even worse on the Office leasing side where we now have almost 21% vacancy. Pre-COVID, the average days on market for office was roughly 300 days… 10 months. At these vacancy rates offices may go unleased for as long as 2 years. Also, maybe South Florida is just not the right area to get into office right now. There seems to be a far bigger appetite for cities long the Gulf Coast than the East Coast.
The Optimist Perspective
Offices are far from dead. They’re just taking a nap. After all vaccinations are starting to roll out now. Most people will surely be back working in the office by year end… well, except all of those that completely got rid of their offices realizing that working from home was not that hard to do. Office building owners will just need to adapt by implementing more stringent protocols. Businesses will most likely need to revert the trend of open office spaces and shrinking SF per employee. Private offices will come back into vogue if only for a little while.
But Questions Remain:
- With so many white collar businesses moving to Florida, why is overall office vacancy still so high? It is a matter of record catchup? Or, the more likely answer, is the sheer enormity of COVID-19 too “heavy” relative to all of 80+ corporate relocations that have taken place in the last year?
- Of the companies that have totally shutdown their offices, like State Farm’s & Yelp’s headquarters, how many of them plan on coming back to office? in what time frame? … and is anyone even tracking this?
This blog article copied with permission from ChadMassaker.com
All graphs in this article came from PWC’s Emerging Trends in Real Estate 2021 report.
Author: Chad Massaker
Commercial Real Estate Strategist, The Pisaneschi Group at COMPASS
Chad is a serial tech entrepreneur turned commercial real estate strategist. He practices real estate in South Florida, specifically Palm Beach County in cities like Palm Beach, West Palm Beach, North Palm Beach, Royal Palm Beach, Riveria Beach, Boyton Beach, Deerfield Beach, Boca Raton & Delray,
Chad works with The Pisaneschi Group, a team of real estate agents specializing in South Florida Luxury and Commercial real estate sales and leasing. The Pisaneschi Group’s broker of record is Compass Florida.