The Office Market Opportunities in a Post-COVID World

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Megan Walters, Global Head of Research, Allianz Real Estate
Francois Trausch, Global CEO & CIO, Allianz Real Estate
John Murray, Global Head, Private Commercial Real Estate, PIMCO

Are offices a thing of the past? 

In a recent survey conducted by Jones Lang LaSalle*, about 56% of companies were waiting until the second half of 2021 to make the decision whether to return to the office.

One area with very strong consensus is the idea of a hybrid model, where many people would like to choose to work from home on a flexible basis. Three out of four firms surveyed said that they would probably expect about 20% of their workforce to work from home on average two days a week.

Over half of the firms expected to increase the amount of floor space per person when people return to the office by as much as about 20% for health and hygiene factors, and to accommodate different styles of working that might be much more collaborative.

On balance, the working from home factor seems to come out evenly. But as in any economic downturn, there will be companies that have not survived the pandemic terribly well, and they will need to give back space. Therefore, we might see more vacant space coming to the market from an economic perspective regardless of the working from home situation.

Key trends affecting the office market 

We have observed that there are four themes core real estate investors and tenants are looking for in offices. First, reduced carbon footprint – we are paying increasing attention to carbon footprint reduction in all the office assets we are acquiring. The second theme is well-located central offices and the third is tenant experience: Tenants want more amenities and more technology in their buildings. Finally, we notice that the mixed-use concept is becoming more popular. Even old buildings can be transformed into mixed-use assets.

Capital returning to select areas of the office market

Looking at the U.S. commercial mortgage-backed securities (CMBS) market today, less than 2% of the universe has office loans that are in delinquency. So, tenants are generally not defaulting, but there are reasons to be more concerned about secondary office and secondary locations.

In terms of our investment activity, we’ve been contrarian and have acquired two vacant office complexes in Silicon Valley over the past nine months. We see less pressure on research and development types of markets, because much of that type of work cannot be carried out at home.

Finally, we are seeing capital come back to the office market, particularly in the New York and San Francisco areas. As a real-time example, we recently pursued a lease-up office deal in Manhattan where bidding competition accelerated over the last 60 days, ultimately resulting in the winning bid going about 10% above broker guidance. So similar to the housing market today, you’re seeing capital come back and some accelerated bidding activity.

*JLL Account Pulse Survey, February 2021

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