The impact Covid-19 has on office leasing

commercial real estate Jul 28, 2020

It came out of nowhere, and we could be feeling the effects of the novel coronavirus for some time. But analysts in many industries are saying it's too early to throw in the towel. Commercial real estate is no exception. There are many challenges, this could be a rise of companies finding new offices in the second quarter. The questions on everybody’s lips are, how bad is the impact? When will the recovery begin? And, what will lead to a potential bull run out of this mess? When should you book an office tour? Should you renegotiate rent price?

Counterbalancing forces

Yes, millions of companies across the country have been told they cannot allow more than 10-20 people groups to gather. Effectively, this means no one is going to work in offices. Instead, at-home working is the most popular option for businesses that were previously renting office space. Since the world is searching for a vaccine, one can expect to see a rise in desired commercial real estate from the biotechnology sector. Another factor is, coworking spaces were already on the decline and WeWork being a prime example of this. Smaller companies will look to take advantage of the new office space climate to go ahead and set up their own headquarters. CBRE has given a prediction which spurs this narrative. The price per square foot of office space was around $35.66, in the first quarter. Those finding new offices will be pleased to know this could drop to as low as $33.23 by the fourth quarter. This could see a rapid rise in businesses looking to renegotiation rent prices. The shocking piece of this prediction is, it will take until the first quarter of 2022 to recover back to where it was.

Risk, reward and return

The risk of coming back to work too early is setting off a second wave. All governments around the world are conscious of this fact. That’s why businesses will more than likely do what’s going to be deemed ‘phased reopening’ in their commercial real estate offices. According to CBRE almost three quarters of businesses will do this kind of return-to-work policy. 72% of businesses agree this is the most probable and risk conscientious strategy. However, half of them will retain the option of their employees working from home for the predictable future. This does depend on the sector and industry they are in. As office space stands, we could be seeing a consistent negative absorption continue steadily into the second quarter. What also puts a spanner in the works is real estate agents, needing to give an office tour to potential clients. Would this move to the virtual sphere or become one of the first things to return as the rush to reopen begins?

The options

Many companies will need to weigh up whether they should continue to rent or start finding new offices that are cheaper. Executives should take an office tour of their own space and see what areas they could sacrifice. They could start renting office space they don’t need, or they may find that renegotiation rent prices is the best option. This would allow them to take advantage of the lower square feet prices to come. According to Deloitte, REITs long-term lease contracts currently in place will soften the blow on the industry. For any business that is renting office space, may find it easier to create a skeleton crew while using cloud systems. Allowing for the rest of their employees to work from home until the economy picks up fully.

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