Unprecedented disruption to office markets

Global Market Perspective, May 2020

The office sector has undergone a sharp change in direction since the onset of the pandemic with global leasing volumes declining by 23% in Q1 from 12 months earlier, with many deals on hold and in flux. However, given that most restrictions across EMEA and the U.S. did not come into effect until March, Q1 leasing volumes will not yet reflect the full impact of COVID-19.

While large parts of the world are still under severe government restrictions, the first signs of green shoots are appearing in China, where people are beginning to return to their offices. In some Chinese cities, utilization rates have quickly bounced back close to pre-crisis levels as businesses restart and the economy tries to regain traction. Even though this should provide some level of cautious optimism to other parts of the world, the next six months are likely to be characterized by uncertainty and widespread disruption leading to subdued leasing volumes and rising vacancies. Across most cities, headline rents remained unchanged in Q1. However, landlords are noticeably undertaking more intense renegotiations and, in some instances, increasing incentives to expedite discussions and maintain tenancies and longer-term cash flow.

A longer-term perspective: remote working, de-densification and well-being

While some corporates might look to remote working in order to compress their real estate footprint, most are already exploring ways to future-proof their portfolios. Risk mitigation strategies can include investments in Business Continuity Planning spaces and remote-working facilities. De-densification is also probable, as the appeal of highly dense, large, open-plan offices is now clearly up for debate. Finally social distancing will highlight the value of day-to-day social interactions. While it is too early to make bold predictions in terms of a shift in the quantum of space required by corporates coming out of this crisis, the physical office will take center stage in facilitating interaction and collaboration and, ultimately, in the health, well-being and productivity of employees.