How fast will office market recover from pandemic? It could take years, some say
With office space availability in the suburbs growing to 17% in 2020, and with even more buildings emptied by employees working from home, what is the outlook for suburban business parks once COVID-19 recedes?
Several experts say the market will bounce back, but they differ on how long it will take.
While developers and landlords are optimistic and say people's preference to work together will drive a quick return to pre-COVID-19 occupancy levels, an industry data analyst says it'll take years for demand to catch up with supply.
"Three or four years is our expectation for recovery," said Brandon Svec, a director of market analytics for CoStar Group, a data information and marketing platform used by about 300,000 real estate professionals.
"We've seen companies take a very cautious approach to the virus, understandably," Svec said. "We expect a lukewarm re-entry to the market, with people coming in maybe a few days a week, but long term we expect most people will go back."
Michael Klein predicts the return to suburban offices will go more quickly.
Office occupancy "will likely return to normal when all the kids go back to school," said Klein, managing principal of Chicago-based Glenstar, an owner-developer-operator of commercial properties in Chicago and Dallas.
Over the course of 2020, office availability in the suburbs increased from 16% to 17%, which Svec said is a dramatic shift for so short a time. If owner-occupied space is excluded, office availability in the suburbs is 21.6%, up from 20% at the beginning of the year, Svec said. In the Chicago region as a whole, a record 90 million square feet of space is available, Svec said. A year ago, there was about 76 million square feet available, consistent with the previous several years, Svec said. Even at the height of the Great Recession from 2007 to 2009, that figure was only about 81 million square feet.
"If you're a developer, you're looking at a market that needs to mop up a lot of supply, unless you already have a tenant in hand," Svec said.
Availability includes vacancies, new construction and space already being listed for lease even if it isn't yet vacant.
"A lot of the vacancy is based on the pandemic," he said of the record available space.
Svec added that if even 10% of people temporarily working from home make that a permanent arrangement, it would trigger a significant change to the market.
The trajectory the recovery will take depends on a number of factors, Svec said, including how quickly the health crisis will be resolved, how many companies will decide they have too much space, and to what extent individual sectors of the economy rebound.
When kids go to school
Klein sees a close link between the recovery of the office market and the return of full-time classroom instruction in schools.
In Chicago and its suburbs, where remote learning has become the norm, only about 8% to 10% of the office workforce is back in office buildings, Klein said. In Texas, which has fewer restrictions and kids largely back in school, 40% to 50% of the office workforce is back in buildings.
Klein said he recently heard the issue addressed by a real estate professor who pointed out that all the technology making working from home possible was available before COVID-19 struck, yet most office workers did not stay home.
"Did we really think we were doing it wrong?" he asked.
Jason Simon, a principal at the Chicago-based real estate firm Colliers International, said there probably will be a lingering impact from the flexible work-from-home policy many large corporations created in 2020.
But over the course of this year, businesses have learned a lot about what types of work can and can't effectively be done in isolation, he said. While accounting and certain types of administration can be done from home, other things like sales and interaction with clients haven't fared as well.
"Creation of new business is suffering," Simon said.
Two suburban campuses
Colliers is handling the leasing at two major redevelopment projects in the Northwest suburbs: the Veridian development on the former Motorola campus in Schaumburg, and Bell Works Chicagoland on the former AT&T campus in Hoffman Estates.
Simon said that while amenities, access and convenience have always been important factors in office real estate, there will be an even stronger emphasis on these in the re-emerging market. Redeveloping properties like these are well positioned for that market, he said.
The formerly Itasca-based Boler Co. began moving into its new headquarters on the Veridian development in December.
"While there will definitely be shifts in office use moving forward, Boler's presence here is a remarkable addition to Veridian and validates the long-term importance of the built environment for certain office users," said Bob Burk, managing partner of UrbanStreet Group, the master developer of the Veridian project.
While much of the former Motorola campus has been demolished for the mixed-use redevelopment, there remains a prominent central office building on the property that Burk believes still has great potential with a rigorous refurbishment.
Schaumburg and taxes
Schaumburg is the second largest hub of economic activity in the state, after Chicago. Economic Development Director Matt Frank said the village's office market is crucial to the strength of that overall business presence.
Schaumburg doesn't have the number of residents Naperville does, but it makes up for it with that traditional daytime population, Frank said.
Svec concurred that businesses as diverse as restaurants, convenience stores, and hair and nail salons see significantly less traffic in the absence of office workers.
Schaumburg Village Manager Brian Townsend said the village hasn't seen any recent uptick in office landlords appealing their property assessments. A spokesman for the Cook County assessor's office did not immediately respond to a request for comment.
Townsend added that even if such appeals did appear, they would take a while to have an impact and wouldn't affect the amount of property taxes the village receives, only how it's divided among taxpayers.
Klein said that given what property taxes are in Cook County, appealing assessments is a common practice. This year's reduction in active occupancy might be another argument an office landlord could make, but whether it would be effective would largely depend on how negatively affected a property actually was, he said.
Tenants who are still paying their rent, whether employees are using the space or working from home, don't provide landlords with a strong basis for appeal, Klein said.