Google CEO, Sundar Pichai announced in April that Google intends to invest approximately $9.5 billion in its US offices and data centers in 2022. Although it may seem unreasonable to amplify investing in office spaces in an age of increased workplace flexibility, it is a clear indication that physical office spaces are still in demand.
However, the adverse effects of the pandemic on the utility of office spaces cannot be overlooked. Studies suggest, that over 69% of businesses in the U.S. have permanently closed some or all of their office spaces, since March 2020. So, as an office investor, the question that must cross your mind is, should you or should not invest in office spaces in 2022?
Well, the answer lies in the rise of hybrid and coworking office spaces, that not only embrace flexibility but also take care of employee well-being. Therefore, in this blog, Lilypads explores the office market trends, reports, and predictions for 2022 to help you decide whether it is a good time for investing in office space.
Factors driving the demand for Office Space post-pandemic?
Before the pandemic, your average office was dedicated to productivity, culture, and winning place for the talents. But post-pandemic, priorities have shifted to desiring a workplace that is not only modern but also flexible. Employees are demanding added services and amenities in their office spaces beyond restricted cubicles if they are to return full-time to offices.
According to David Gooderham of WSP, office buildings must justify their existence by becoming a destination with a purpose. There are various factors in the post-pandemic that is responsible for driving demand in the office market.
1. Flexible Office Space
The pandemic has proved that remote working can be also productive while providing a greater sense of freedom. Organizations are introducing greater levels of flexibility in their workplace strategy. A flexible workplace strategy provides the perfect balance of work and social life. Organizations have come up with three different strategies for the workplace:
- Office-Centric Workspace – Organizations believe employees working 80-90% of the time in offices results in higher productivity and strong office culture.
- Hybrid Workspace – Employees can work in the office 40-80% of the time in offices. In a hybrid workplace, companies believe they can boost innovation and productivity by 10x when employees work face-to-face in a flexible work environment.
- Remote Working – Remote working is preferred by mostly startups and organizations whose main goal is to maximize productivity while reducing operational costs as much as possible. It also promotes flexibility and independent working by allowing employees to work 80-100% of the time from remote locations or homes.
2. Collaborative Workspace
In a collaborative workspace office, employees from different companies can share the same space. A collaborative workspace comprises a mix of private offices and shared areas. They also have designated common spaces like video conferencing rooms or meeting rooms equipped with top-of-the-line amenities.
Companies like WeWork and Regus provide coworking office spaces, virtual office spaces, and necessary collaborating tools all over the country. Collaborating tools like Zoom, a video conferencing app helped real estate businesses survive during the pandemic.
3. Smart Amenities
Companies following hybrid work cultures must be equipped with top amenities. To increase productivity and streamline operations, having the right technology is vital, regardless of the real estate footprint. Collaboration tools help to achieve a perfect sync between on-site and remote working employees by improving communications. Amenities like high-speed wifi, cloud-based applications, and remote-controlled indoor environment almost often attract and retain tenants.
As people have become more accustomed to remote working, the organizations that prefer hybrid working must strategically select office locations. Also, the urban exodus creates a need for companies to keep track of employee locations in suburban and secondary markets. Furthermore, having the right location can reduce operating costs as well as increase brand visibility, and attract the target market.
Office market outlook for 2022
With a high vacancy rate, for most of 2020 and 2021, the office market had struggled to maintain a positive trend. Nevertheless, the emergence of new workplace trends is expected to bring positive changes in the office real estate market this year.
According to CBRE, the market activity for offices recovered in the latter half of 2021. The outlook for office real estate seems to be positive in 2022. While the performance in Q1 2022 was mixed due to Omicron scares that resulted in a dip in net absorption. While occupancy was slightly negative, it wasn’t enough to nullify the gains from the last quarter of 2021. Moreover, due to relocations and Omicron, the gradual decrease in vacancy rates was also interrupted in 2022 Q1.
However, the supply/demand balance in the office sector will remain highly favorable for real estate developers for the remaining year. New office construction has seen a downturn during 2020 and 2021, and the delivery of new-build square footage was 40% lower than in 2019. Many projects have postponed their delivery dates which seems to pace in 2022.
According to Avison Young, another 60 million square feet have been allocated for the construction of new office spaces. The total square feet for the office construction pipeline was summed at 144.7 million square feet. Market momentum continued to build over the first quarter of 2022 as gross leasing volume increased by 5.4%, the fifth consecutive quarter of improved tenant demand. The asking rate has seen a minuscule increase of 0.5% which hit rock bottom in early 2021. The average asking rate of the country in the first quarter stands at $33.12 per square foot.
The total investment sales volume had a drastic rise from the mid of 2021 and maintained its growth.
The total office sale in Q1 2022 across the nation was $18.9 billion. Out of which $7.5 billion originated from leading markets like Seattle, Dallas, New Hersey, Houston, Bay Area, and Manhattan. Recently, Google acquired a new office in New York with a net worth of $2.1 billion. High-profile deals like these show that demand for office spaces is growing back with a promising outlook for the rest of the year.
Things to watch out for office properties in 2022
- Economic and financial problems – The office market is subject to change with the recovery of the global economy. Factors like unemployment and workforce participation rates play an important factor in the office market as well.
- Social and political problems – Government policies and laws providing better well-being for the people will have an impact on your office property.
Hottest Office Space Markets In 2022
After the steep decline during the pandemic, the office market is showing signs of stability at a slow yet steady rate.
The previous year ended strong with a steady decrease in vacancy rates and positive net absorption. Although some regions witnessed a decrease in net absorption in 2022 Q1, overall geographically it was equalized. Due to relocation, cities like Dallas, Austin, Denver, Miami, Nashville, Phoenix, Raleigh, Salt Lake City, and others observed positive net absorption. Additionally, states with low taxes also witnessed positive net absorption with a total of 1.9 million square feet in 2022, Q1.
Net Absorption in major metro markets, 2022 Q1. Source: CBRE
Most of these cities fall in the sunbelt region, where the ROI is expected to be positive in 2022. This region mostly consists of warm states across the southern region. Based on recent reports from CoStar Group and US Census Bureau, the ten fastest-growing cities in the country are all in the Sun Belt. Moreover, according to CBRE, this region makes up 58% of all leasing activity throughout the nation. It is also predicted that in 2022, the sunbelt regions will reach pre-pandemic levels in terms of leasing activity.
The Rise Of The Hybrid Workplace
If anything the pandemic taught us was an office is much more than just a workplace to submit tasks before the deadline. It is also a place for socializing, engaging with clients, collaborating with others, brainstorming sessions, and more.
As we have already discussed, flexible workspace is a leading factor determining the growth of office space in 2022. Out of the three strategies of flexible working, the Hybrid workplace is the most popular and preferred by most companies.
According to a study by the JLL US group, 53% of the employees are not satisfied with regular offices. According to employees, WFH provided a greater extent of freedom and a flexible schedule which is missing in today’s offices. Thus, offices need a change in their design to suit employees’ expectations.
Hybrid work models are redesigning traditional office spaces by breaking down cubicles to create more open spaces. Individual spaces are being turned into collab rooms to improve innovation and collaboration. Moreover, hybrid workplaces also aim to operate efficiently, provide better health and wellbeing, and improve employee engagement with clients.
Source: JLL, US, Your Next Office Guide 2021
Trends That Will Impact Office Space In 2022
The market condition of office space is susceptible to change in any direction at this particular instance. However, the following trends are most likely to have an impact on the office real estate market. These trends will provide you with an opportunity to get the maximum results from your investment.
1. Office Market No Longer Needs To Be Held Back
Since the pandemic office properties have been suffering a lot. With lockdown and social distancing norms to contain the spread of the disease, the office market witnessed the worst lows ever. Closure of office spaces in 2020 and remote working resulted in high vacancy rates, a drop in net absorptions, rent defaults, and more. Additional factors like the economic downfall accompanied by the Great Resignation had a significant impact on the office market.
Today as the economic condition is slowly recovering and employees are gradually returning to their offices, the office market is expected to grow rapidly. In response to the sudden demand for office space, businesses will be revived along with new office space construction. As a result, this will increase productivity and boost capital investments in the office market.
2. New and Innovative Co-working Office Space
Modern offices are undergoing a day and night transformation. Today’s offices are more focused on incorporating top-of-the-line technology into their work environment along with changes in its layout.
The main objective of offices is to increase productivity, and engagement between employees and clients, and to improve collaboration while retaining talent. Thus, offices are incorporating better collaboration tools, better amenities, and coworking spaces.
Artificial intelligence and IoT devices in offices can eliminate risk and repetitive tasks thereby streamlining operations and increasing productivity. It also helps in optimizing office workspace and automating project management to save time, and effort and also reduce operational costs.
3. Flexible Lease Terms
Before the pandemic, office spaces were generally leased for the long term. During the pandemic, as companies preferred to work remotely, most office tenants were reluctant to rent offices. Therefore, to prevent further vacancy loss, office landlords offered tenants flexible short-term leases.
As we have seen in 2021 and 2022 so far, there has been a significant increase in office leasing. However, the short-term leasing trend continued with it. Short-term leases provide owners with the opportunity to increase rents at frequent renewals.
4. Employee Wellness Programs
Besides leaving a huge impact on the lifestyle of the employees, the pandemic had a huge impact on their mindset as well. Employees are more conscious about their health and well-being. Therefore, office spaces must provide and maintain a work environment that promotes healthy living and a balance between work and social life. Starbucks, Citigroup, and Bank of America are encouraging mental wellness programs in their offices.
Office spaces are integrating relaxation spaces, fitness centers, clean and green indoor environment. On top of that, offices must be able to provide their employees with a better ventilation system and monitor air and water quality.
5. Competitive Market
As the market recovers, there is expected to be a huge demand for office properties. To attract more tenants you can provide better and improved facilities for businesses. Investing in office spaces with low operating costs might be a good pocket-friendly deal. Therefore, look out for office rental properties that stand out in this tough competition.
Read Lilypads’ article on Emerging Office Trends in 2022, here.
Challenges in office investments in 2022
As with any real estate investing, simply following the trends isn’t enough. You must also be aware of the challenges that come with an investment property. Here are some of the challenges you might face while investing in office spaces:
1. Lack of proper execution
Although you may think that redesigning your traditional office into a hybrid space will be fairly easy, you should remember that lack of knowledge regarding the requirements of a hybrid workspace and improper execution can make your office space strategy fail.
2. Shortage of Tech Tools
Real estate has a reputation for being late in adopting the latest technologies in the market. In this case, the industry needs to take a giant leap concerning technology to successfully a hybrid working model. Real estate developers are looking for ways to easily incorporate top-notch tech solutions to ensure smooth operations in the workplace.
3. The market is still recovering
In terms of net absorption, vacancy rates, and leasing activity, the market has yet to reach pre-pandemic levels. As the economy slowly recovers, the markets will experience a surge in demand for office spaces. As a result, it might lead to changes in the rental price along with lease terms.
Until now due to high vacancies, office rents were significantly low to attract tenants and fill vacant spaces. As a result, direct space is more competitive when compared with flexible space, especially for price-sensitive tenants.
Things To Follow Before Investing In Office Spaces, 2022
1. Select the right property type
Taking a closer look at the local market will allow you to discover what industries and asset classes are doing well. By using this information, you will be able to choose one of three office property types:
- Class A – They are high-end office buildings equipped with all sorts of amenities like security, covered car parks, first-in-class elevators, HVAC systems, and more. You can find this category of buildings in the prime location of the city. Usually having high rents, these buildings are mostly rented by corporate headquarters, financial institutions, or law firms.
- Class B – Class B buildings are the most readily available office spaces in the market with average market value rents. Usually, these are a bit old buildings located in the suburbs. Renters of these properties value function over form and are mostly from the IT industry.
- Class C – These are properties with below-average rents. Generally, small businesses who are on a budget but also prefer function over form choose these types of buildings.
Other factors that determine building type are whether it is for single-tenant or multi-tenant and the structure of the building.
2. Screen tenants thoroughly
It is important to screen tenants before going ahead with the investment. Make sure that the tenant type matches your investment property and is suitable for the long term. Also, perform a background check on the business, its legitimacy, and the credit quality to avoid any potential risk.
3. Understand the market trends
Before investing in office real estate, you must have a good understanding of the market trends and whether the market conditions are suitable for investment. You’ll need to consider factors like employment and unemployment rates, building operation costs, population growth, etc.
Demographics play an important role as well. For instance, during the pandemic, there was a huge surge in relocation to the secondary and tertiary markets.
4. Consider office REITs
Office real estate investment and trusts REITs are for investing in office buildings only. Office REITs can own and manage office properties while renting them to tenants. Just like a normal investment, REITs receive rental income from tenants while enjoying long-term appreciation.
The Lilypads Bottomline
Investing In The New Office Space: Guide For Investors
From the above-mentioned statistics and insights, we feel it is safe to conclude that office investments are gradually picking up their pace. The rest of the year looks promising and is expected to increase from thereon. And there is no doubt that hybrid working is the future of work. However, make sure to perform thorough due diligence and closely monitor the market trends. Consider all the challenges you may face and key factors that drive the office market.
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