OIQ_091521

September 2021 — Office & Industrial Quarterly — Page 9 www.crej.com OFFICE — MARKET TRENDS W hen a vaccine rollout became a conceivable reality, outspoken employ- ers began singing a differ- ent tune. Some of remote work’s biggest champions – J.P. Morgan, Goldman Sachs, Apple, Facebook – were forthcoming with their plans to make their way back to in-person operations. Whether a full-return or a hybrid approach, the changed sentiment among industry giants reflected a COVID-19-era rev- elation: Our in-office space offers more than we think. It’s not to say that the remote work experiment didn’t go well, or even better than we’d planned. Technology vendors and cloud com- puting capacities made the transi- tion to at-home work almost seam- less. When it comes to onboarding, networking, brainstorming and simple socialization, the on-screen interaction did leave something to be desired. Sentiments regarding a return to the office have changed. But have changed sentiments trans- lated into market action? n Return of the tour. Action in the commercial real estate segment doesn’t hold a candle to the world- record price race that’s happen- ing in the residential space. But throughout the last few months, signs of reprieve have surfaced, including but not limited to an uptick in tour requests. Of course, tour numbers can’t be extrapo- lated with any certainty to indicate signed contracts or long-term lease relationships. But in a recent report by the experts at UBS, it released a figure that shows tour requests for dense and coastal markets includ- ing New York City, San Francisco and Seattle. Around March of this year, a long-standing downward trend begins to pick back up. Cities like New York have seen twice the amount of interest in about a three-month period. A chart that takes into account the previ- ous month’s numbers might even stretch to resemble a smile. Another important factor influ- encing the office real estate market is the rebound in office-using jobs that came toward the end of 2020. Faster than originally predicted, office-using sectors recovered from the dip in unemployment in second-quarter 2020. Compared with the top 15 markets, Denver kept pace, recovering between 50% and 100% of lost office jobs between August and December of 2020. n The market as it stands. A popu- lar PwC survey came out at the beginning of this year that dem- onstrated the expectations of 133 C-suite executives; 75% expected their employees to be back in office by now. The current state of the market, and the accuracy of those predictions, depends heavily on the region in question. Dense cities with a high dependence on public transport for commuting remain slower to return, and states with more restrictive policies have seen diminished capacity. But according to UBS, the national office vacancy rate for the first quarter of this year was 16%. That represents little to no deviation from the national average. There’s also been a uniform trend toward quality as a main determin- er of leasing decisions. As predicted, the return to office has exaggerated the preference for modern build- ings. Built environments with air filtration, automation, proper spa- tial design, hands-free controls and integrated building management applications have been rewarded by post-COVID-19 tenants. This is a trend that’s been consistent across all segments and is expected to continue. n Colorado office real estate: The rule or the exception? Looking at Den- ver specifically, market research shows a 14.8% vacancy rate across all market classes for direct office real estate (excluding sublets). Compared with Fort Worth, Texas, (21.8%), Houston (23.6%) and Atlanta (17%), that’s at a manageable rate, still lower than the national long- term average. Denver’s vacancy for Class A space is similar, hovering at 14.2%. Further, Denver experi- enced a declining rate of negative net absorption at the end of 2020, meaning the amount of new supply entering the market being bought by landlords and investors was on an upward trend. Sublease vacancies also are an important area of focus to under- stand how the market is performing as a whole. When ample subleasing space is available, it has a negative overall effect on rents across the market. For Denver, sublet vacan- cies represent about 15% of all office vacancies, which is about the midrange for the market – San Francisco is at a high of 30% and Miami is at a low of 0%. However, new supply entering the Denver market indicates that vacancies in the subleasing space could continue to grow even with some return to leasing activity. Since June, Colorado has seen a 150,000-plus increase in non- farm payroll jobs. Those roles are spread out over many sectors, but tech companies, absorbing 247,000 square feet, and companies in the energy sector, 215,000 sf, are driving most of the spatial uptake. The past many months of market observation have reinforced the truth that markets move without any regard for our expectations. Soaring prices in the housing mar- ket are a good example. The con- tributing factors can be understood through a market analysis, but no one would have predicted a boom of that size to follow on the heels of a pandemic-induced recession. Sim- ilarly, it’s too early to understand exactly how a hybrid workplace will actualize and what its effects will be on office real estate. While Den- ver’s vacancy level is slightly below the national long-term average, new supply, delayed returns or shifts in office-job employment could con- tinue to change. Keeping an eye on relevant market indicators, we’ll be able to watch the story unfold in live time. s zain@zainjaffer.com Relevant indicator tracking provides market pulse Zain Jaffer CEO, Zain Ventures