Commercial Investment Real Estate Spring 2021 | Page 15

communication may be as important for the generation of new and valuable ideas than its formal and planned counterpart . Without the watercooler , future productivity suffers . In March 2020 , when most office workers were sent home , much of the rest of their year was already planned . In that circumstance , human nature allows us to bear down and complete those tasks with efficiency . But how many great new ideas were lost due to the lack of an office presence ? It is this line of thinking that will prevent a more significant structural change in where we work and will also prop up the office sector moving forward .
Additionally , GDP growth is likely to hit 5 percent each year for the next two years and will continue to be above its long-run average for a short time thereafter . This bullish economic outlook is shared by many firms , prompting them to increase their mid- to long-run growth prospects . Even in the face of a new hybrid work situation , this trend will necessitate an increase in square footage . The recent leasing activity of tech giants Facebook , Apple , and Amazon , who have grown through the pandemic , provide evidence of this phenomenon .
2023 Forecasted Difference in the Office Sector : Before and After the Pandemic
10 Metros with Smallest Declines or Growth 2019 to 2023 ( Effective Rent )
10 Metros with Largest Declines 2019 to 2023 ( Effective Rent )
Birmingham , Ala .
0.8 %
San Francisco
-16.0%
Charlotte , N . C .
0.4 %
San Jose , Calif .
-13.1%
Little Rock , Ark .
0.4 %
New Orleans
-11.2%
Minneapolis
0.2 %
New York Metro
-11.1%
Tacoma , Wash .
-0.1%
Orange County , Calif .
-9.5%
Charleston , S . C .
-0.1%
Houston
-8.6%
District of Columbia
-0.8%
Ventura County , Calif .
-8.3%
Atlanta
-1.0%
Las Vegas
-8.2%
Richmond , Va .
-1.1%
Austin , Texas
-8.2%
Memphis , Tenn .
-1.2%
Fairfield County , Ohio
-7.6%
Source : Moody ’ s Analytics
All this said , the recovery is unlikely to be uniform . The charts shown here illustrate the rent level difference from 2019 to its projected 2023 level . While not a “ death to density ” situation , there is a bit of a difference in which areas are able to recover faster . California ’ s Bay Area , greater New York , and greater Los Angeles — all dense areas with expensive office sector real estate — will find a return to pre-pandemic rent levels a bit more difficult . But these areas historically have much greater variation in rents due to less flexibility in their development markets .
There are also a few anecdotes and some data to support that some firms may be diversifying away from the more expensive central business districts and finding satellite space in either the suburbs or less expensive metropolitan areas . These findings are very preliminary , though , and this data includes a lot of noise .
To conclude , the worst is yet to come for the office sector , but it ’ s not predicted that this situation will be equivalent to e-commerce ’ s assault on brick-and-mortar retail . Firms are still finalizing their post-pandemic office space needs . Some firms may renew with less space as leases expire , and others may even move to a new location within or outside of the current metro . Rent levels in New York and San Francisco will remain below their pre-pandemic levels until later this decade , but it is expected that tech firms , both established and startups , will take advantage of the discount , ushering in a new generation of talent into those respective cities . Long story short , the office is not dead .
Thomas P . LaSalvia , Ph . D . Senior economist at Moody ’ s Analytics Reis

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