A demand forecast by the NAIOP Research Foundation is projecting a strong resurgence of the U.S. office commercial real estate market through 2023.
As the unemployment rate declines, more workers return to the office and the economy continues to improve, the office space net absorption forecast has been revised upward from 1.8 million square feet to 8.3 million square feet in Q4 2021. The total net absorption in 2022 is forecast to be 53.5 million square feet with a quarterly average of 13.4 million square feet. In 2023, the projected net absorption is 34.3 million square feet during the first three quarters, with a quarterly average of 11.4 million square feet.
This forecast is dependent on continued economic growth, which seems plausible given recent data. The measured unemployment rate in September was 4.8%, down from 6.1% in April. Supply chain issues have resulted in higher consumer prices and stoked inflationary concerns. Still, real Gross Domestic Product (GDP) rose at an annualized rate of 2.0% in Q3 2021, a pace that cooled from the Q2 2021 real GDP growth rate of 6.7%
According to the report, “although the number of people currently employed in professional and business services, financial activities and information industries is only 1.5% lower than in February 2020, office utilization rates remain much lower than before the pandemic due to continued concerns about coronavirus transmission. A late summer surge in the delta variant of the coronavirus delayed many firms’ return-to-the-office plans. Since then, infection, hospitalization and death rates have all declined, signaling it is now safer to return to in-person interactions when compared to just two months ago. Office access data collected by Kastle Systems for 10 large U.S. metropolitan areas indicate an average office utilization rate of 36.8% in late October, up slightly from 36.1% at the beginning of the month, but still a long way from the near-full utilization rates recorded in early March 2020.
Given a nationwide labor shortage, recruitment and retention are primary concerns for employers. With workers demanding not only greater wages and benefits, but also more flexible working conditions, employers are likely to continue to offer hybrid and remote work options at higher rates than before the pandemic.
“There is no question that the pandemic has permanently altered how and where people work. Employees with longer commute times will be more likely to stay in work from home or hybrid work models,” said Thomas J. Bisacquino, president and CEO of NAIOP. “Still, with COVID-19 cases declining, more workers will feel comfortable seeing the office as a safe and better place for collaboration.”
While a long-term increase in remote and hybrid work arrangements is likely to reduce demand for office space, this should be more than offset in coming years by employment growth in office-using industries, according to the report.