by King White, on Jul 19, 2021 5:06:01 PM
Prior to the pandemic, the economy was humming with office and industrial real estate sectors peaking with extremely low vacancy rates, rising rental rates and all-time-high tenant demand. Then everything changed in March 2020 when the COVID-19 pandemic hit and instigated the rapid transformation of the commercial real estate market. As we are now emerging from the coronavirus pandemic, it appears to be a tale of two real estate markets with the best of times for the industrial sector and the worst of times for the office market.
As a specialist in global corporate real estate and tenant representation strategies, Site Selection Group has evaluated these dynamic market conditions to help tenants develop location strategies aligned to their goals and objectives.
The best of times for the industrial sector
The industrial sector has been on fire throughout the pandemic as consumer demand and supply chain disruptions transform where products are being produced and distributed. Prior to the pandemic, there was already a shift from brick-and-mortar retail to e-commerce as well as a shift from offshore manufacturing to onshore North American production.
The pandemic fueled the transformation which is now peaking with over 100 million square feet absorbed in the U.S. per quarter, according to CoStar Group. Site Selection Group estimates this is much higher when off-market, owner-occupied, industrial manufacturing build-to-suits are included. The following graph shows how industrial absorption and deliveries are leveling out while vacancy rates are stabilizing in the 5% range for the next couple of years.
U.S. National Industrial Market
Net Absorption, Net Deliveries & Vacancy
Source: CoStar Group
It has been the worst of times for the office commercial real estate sector
Unlike the industrial sector, the office sector has not recovered and is undergoing a major transformation due to the impact of work-from-home and workplace realignment. There is now over 200 million square feet of sublease space available across the U.S. as a result of these changes. This transformation has impacted most office types such as headquarters, software engineering centers, call centers, shared service centers and sales offices. It has also impacted most industry verticals including technology, financial services, telecommunications, nonclinical healthcare and business services. The high-growth technology sector had been one of the driving forces behind the pre-COVID-19 peaking office market. It is now one of the biggest adopters of work-from-home initiatives. We estimate the office market will not begin to stabilize until at least 2023 and more likely 2024. The following graph illustrates the impact on the office market and the amount of time to recover.
U.S. National Office Market
Net Absorption, Net Deliveries & Vacancy
Source: CoStar Group
Conclusions
The office and industrial sectors have never been so inverted during a recessionary cycle which creates challenges and opportunities for tenants. It is a tale of two real estate markets with the industrial sector faced with insatiable demand, limited supply and rapidly increasing rental rates, while the office sector is plagued with uncertainty, a glut of sublease space and a potential looming financial crisis. As a result, it has become more important than ever for tenants to leverage conflict-free, tenant representation and site selection professionals who understand the balance workforce, logistics, real estate and other business factors in order to successfully navigate these challenges and opportunities.
