By now, most companies have drawn lines in the sand about the future of work attendance. While a lot of companies have kept hybrid or most-from-home systems in place, others have called their workers back to the office. Because of these market trends, lots of companies are operating with excess office space. The problem is that the market for that space is incredibly weak; aside from specialty offices like medical and laboratory settings, there is way too much supply on the market, and not enough demand.
In the United States alone, there is currently 232 million square feet of surplus commercial real estate up for sub-leasing. To put those numbers into perspective, Amazon’s HQ2 is 8 million square feet. Even more telling, the 232 million square feet is twice the level of surplus from before the pandemic. The only property owners selling today are either desperate for cash, or they are sitting on trophy assets. And those trophy assets are few and far between. Well-leased medical offices and laboratories with high credit score tenants and secure income streams are still attracting plenty of attention from investors, according to CoStar, but that’s about it. Any corporation that has abandoned a satellite office that used to be key for its in-office staff that cannot be sold unless it comes with a substantial discount.
The Banks Chime In
Between the shock to commercial real estate from the remote work trend, followed by the higher interest rates and the prospect of another recession, now is no time to sell, even though many predict that the market will get worse. Experts believe the sub-leasing surplus will persist as companies worry about needing to lay off workers and make other cuts ahead of a recession, and it goes further: the subleasing square footage will never return to the pre-pandemic level.
The slowdown in investment activity described as a gradual slowdown so far will become a dramatic slowdown after the pipeline of deals signed in Q2 and Q3 before rates started to rise are closed. Q4 will be a rude awakening. But even though the situation will be bad, it is still preferable for corporate real estate owners to sit on the real estate, if they can. Companies are still early in their experiments on hybrid work; there is no telling whether these new systems will remain in place when the labour market gets less tight. Companies should expect the situation may be even worse a year from now. The wave of distressed sales that usually occur in downturns have not occurred yet, and that is right on schedule, as they tend to lag the start of downturns by a few years. After 2008, the peak in the distressed asset sales wave didn’t occur until 2010/2011.