While an increase in remote work remains enemy number one for the foreseeable future, a score of other factors are also at play.
The burgeoning WFH trend shouldn’t be the only thing troubling the office asset class, according to a new report from Green Street. Slipping job growth and an uptick in real interest rates pose significant risk to the sector, and while an increase in remote work remains enemy number one for the foreseeable future, a score of other factors are also at play.
The Green Street report notes that the outlook for job growth in office-dominant industries—likely driven at least in part by increased automation—is less favorable than in years past, and a slowdown in “TAMI” sectors (tech, advertising, media, and information industries) has further decreased office demand.
Similarly, demand for financial services office space has softened as the result of Fintech advances and passive investment management. What’s more, a general trend toward increased space efficiencies is likely to go on for longer and at greater depth than previously forecast—a trend that will have the practical effect of reducing net absorption. And from a global perspective, a reduction in overseas capital for US CRE is also thinning demand.
The report predicts that an accelerated increase in real interest rates would dampen value in the office sector as longer lease terms are a less effective hedge against inflation. Also, if supply grows faster than expected, rent growth will slow, but COVID-19 uncertainties swirling in the sector are likely to hamper near-term starts.
Green Street’s analysis dovetails off trends outlined in a recent JLL report, which revealed that most companies are adopting a wait-and-see approach to lease strategies. Office tenants are increasingly favoring smaller footprints and about 43% of renewals in Q4 2021 were five years or shorter in duration. Weighted-average lease terms are also slipping, according to JLL research.
Source: “Office Landlords Need to Beware of These Risks“