Although office occupiers should have it easier with inflation, there is a catch.
There is “no question” that office occupiers have been the least impacted by inflation, according to one industry economist—but that doesn’t mean they’re immune from the challenges wrought by the current economic environment.
In a new analysis, Cushman & Wakefield’s Rebecca Rockey notes that since office occupiers are generally service providers, they’ve had it easier when it comes to inflation. But there’s a catch: “they are experiencing no shortage of challenges as they adapt to work-from-anywhere and intense competition for talent that now has fewer city-edge borders,” she writes. “Companies are also struggling to commit to new pay models for remote-first or mainly-remote workers who can potentially have a much lower cost-of-living than non-remote workers in similar roles.”
And since occupiers generally dedicate between 30% and 70% of operating expenses to labor, with much of their value being derived from intangible assets like intellectual property, retaining and recruiting talent amidst the Great Resignation is even more vital, she says. What’s more, while wages are generally rising across industries at 6% year over year, finance and business services are posting below-average wage growth at 5% year over year, according to the Federal Reserve Bank of Atlanta.
“We have seen some examples, especially in high finance, of significant pay increases, but the impact on headline figures for office-using sectors has been muted thus far. Moreover, in today’s environment, employers are having to factor in benefits of flexible working as an additional and necessary perk to attract the best of the best,” Rockey says. “Even though companies have been reticent to announce official policies around compensation for similar roles across markets with highly varied costs of living, the reality is that hiring in a variety of locations with different labor costs provides an opportunity for firms to compete for talent (and provide higher wages) while still mitigating the overall effect in operating expenses.”
Rockey posits that a window of opportunity exists for companies who need more space or who have seen their leases roll since the pandemic. The US office market “remains the only major sector in a correction,” with negative absorption as of the first quarter and national effective rents down about 12.5% since the last quarter of 2019. Rockey says the best product is performing well, “commanding bidding wars and with high occupancy rates,” while “lower-quality, less well-located product is the weakest.” Class A buildings are driving office absorption in many parts of the United States, particularly in the Sun Belt, according to the latest NAIOP Office Space Demand Forecast published by the NAIOP Research Foundation.
“Depending upon the type of space a tenant needs and where that space is located, the tenant may be confronted with highly bifurcated market conditions,” she says. “Many markets (four-fifths of those surveyed in April 2022) consider overall conditions to be moderately or extremely tenant-friendly, though.”
Last month, NAIOP said that the completion of new buildings may be partly to blame for the continued uptick in office vacancy. The organization projects that absorption of that space will continue to be positive. Overall net office space absorption in the last three quarters of this year is predicted to clock in just shy of 47 million square feet, with net absorption next year forecast to be 47.3 million square feet.
Cushman & Wakefield takes the position that occupiers should prepare for the “inevitable improvement” in market conditions as vacancy tops out and rents hit bottom this year and next: “the window of opportunity will not last forever,” Rockey concludes. “But for now, there is no question that office occupiers have been the least hit by today’s inflationary environment.”