Office Sector Will Face Tough Tests as the U.S. Reopens – Commercial Observer

With the U.S. on track to fully reopen in the coming months and firms scrambling to figure out how to bring employees back to the physical workplace, the office segment seems to be the wild card for everyone in commercial real estate (CRE),” wrote Catherine Liu, an associate manager at research firm Trepp. “The key questions that must be answered during this transition process include the following: As employees increasingly see the benefits of remote work, how do we create an office environment that will be worth the commute? How will the configuration and spacing needs of offices change? What new sanitary and social distancing protocols will need to be implemented? How do we find the balance between allowing work flexibility and ensuring productivity?

How COVID Will Change the Office as We Know It

“While the pandemic was thought to have accelerated pre-COVID trends that had been playing out in CRE, the opposite was seen in the office sector, where de-densification and an exodus out of urban cores became the norm, driven by employees fleeing to the suburbs and relocating to areas with cheaper living costs.

“As the old ‘working from home is unproductive’ adage was proven false and firms prepare for employees to return to in-person work, it is apparent that COVID-19 will permanently change the way we interact with colleagues and the role that technology plays in how we do business going forward. Employers will continually shift away from the once-favored collaborative open floor plans and be tasked with optimizing office designs to maintain proper distancing and safety requirements while also being mindful of square-footage costs. This will likely give rise to new technologies aimed at managing densification patterns, cleaning procedures, and workstation usage.

“Issuers pulled back on the origination of retail and lodging loans after the sectors became the hardest hit by the pandemic and came under intense scrutiny, which led to increased exposure for seemingly ‘safer’ assets, like office, multifamily, and industrial in commercial mortgage-backed securities (CMBS) deals issued in 2020. Office new issues totaled $19.2 billion in 2020 and $10.3 billion in 2021 year-to-date (as of June), which amounts to roughly 34.8 percent and 33.2 percent of overall issuance for those two periods, respectively. The issuance is up significantly from a share of 21.2 percent and 26.8 percent in 2018 and 2019.

CMBS Issuance by Property Type

“The rise in distress rates across office subsectors was modest relative to that of lodging and retail. The long-term nature of office leases allowed borrowers to maintain debt service obligations even though physical occupancy dropped off significantly during the height of the pandemic. The overall office CMBS delinquency rate ticked up from 1.75 percent in March 2020 to 2.65 percent in June 2020 during…

Read MoreOffice Sector Will Face Tough Tests as the U.S. Reopens – Commercial Observer

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