Commercial real estate will hit ‘inflection point’ this year, analyst says
Rebecca Rockey, global head of economic analysis and forecasting at Cushman & Wakefield, joins Yahoo Finance Live to discuss the outlook for commercial real estate as vacancies continue to rise as more companies choose to continue to work from home.
[MUSIC PLAYING] AKIKO FUJITA: Office vacancy rates are rising in cities across the country as businesses increasingly choose to continue working remotely. This leads to growing signs of distress for mortgages on office buildings. Let’s bring in Rebecca Rockey. She is the global head of economic analysis and forecasting at Cushman & Wakefield. She joins us on the phone today. Rebecca, it’s good to have you today. We saw a note from Barclays that basically said that the share of problem mortgages was at the highest level since the current financial crisis. What do you see in the market? REBECCA ROCKEY: So I think when it comes to fundamentals, we continue to see an ongoing correction for the desktop, even if it’s really running out of steam. And we’ve seen a number of markets actually turn the tide, so to speak. And by that, I mean we’ve seen them move into territory of positive absorption and significant accelerations in rental activity and so on. But of course, we’re still dealing with an ongoing wave of supply that was ramping up just before the pandemic and, of course, finally hitting the market. So even in some of these positive absorption markets, for example, you can still see vacancy rates go up due to the amount of construction coming on the market. We nationally expect this inflection point to occur this year, so demand will stabilize and begin to rise again. But we are still in this transition phase. And it’s really the only real estate sector that’s still in that phase. BRIAN CHEUNG: Rebecca, this is Brian Cheung here. Great to talk with you. Have there been any structural changes during the pandemic in demand here? Because we know that many offices have spoken anecdotally of wanting to downsize simply because of this hybrid situation which will likely be a more permanent feature of our work culture. On the other hand, however, you have businesses that are effectively locked into leases they signed before the pandemic that span decades here. So, in your opinion, to what extent has the pandemic been structural on the demand for offices? REBECCA ROCKEY: Yeah, I think that’s kind of a tough question to answer. Because something we’ve seen throughout the pandemic, and really for the first half of 2021, is that companies still had a lot of uncertainty about their future office plans in general, and they were really focused on the safety of their employees, making sure that any type of return to work plans were things that people felt comfortable with. So, thinking about long-term leases and workplace design and all those things, while some companies were well positioned to go there, it certainly wasn’t the majority of them. And I think what was exciting in the second half of last year is that we started to see a return of conviction with leases of 10 years or more, going back to sort of a normal share of the rental activity. I mean, we’ve started to see activity really pick up. When it comes to structural factors, we’re definitely seeing a movement that’s really going to be here to stay towards flexible working. We believe this will affect what we call the marginal effect of a new office job on office demand. But the other thing that I think is important and that we found in our analysis is that clerical jobs are really an inordinate share of all new jobs. So they make up about 20% of all jobs nationally, but they make up well over 20% of new jobs. And that tends to be a compensating factor. And indeed, that’s why in many cases – in fact, in about 25 of the 90 markets we track, we actually started to see positive absorption last year. And it was really on the back of these favorable labor market winds. AKIKO FUJITA: So it sounds like you’re saying that the vacancy rates we’re seeing right now are more of a temporary lull. We’ve had so many conversations about whether, in fact, you’re saying clerical jobs make up about 20% of some of the listings we see, and yet we’re also hearing employees increasingly seek out those jobs that allow for a some flexibility and remote working, which would suggest you don’t need as much office space as we had before the pandemic. REBECCA ROCKEY: Yeah, I think– well, it’s sort of– they’re not mutually exclusive. So we saw a massive market correction in 2020 and really throughout 2021. And that was bigger than anything we’ve seen before. But that’s largely diminishing and becoming increasingly isolated in fewer and fewer cities. So nationally, we’re starting to see green shoots translating into positive fundamentals. This will cause the vacancy to stabilize. Recording positive uptake and accelerating market momentum is not incompatible, in our view, with the recognition that businesses will change the way they work, the kind of role the office plays. We’ve certainly seen the emphasis on high quality, a wealth of amenities, finding a space that makes people excited to come to the office. And what we’ve also seen is that the desire to work from home is definitely there. It’s not going to go away. But when you still have most people coming into the office on certain days of the week, you may not be able to downsize as much as you thought you could, or you may change the look of your space. So maybe you now have more collaboration space or meeting space than you had rather than assigned seating. And so we see a lot of those changes still unfolding. I would say it’s really a trial and error phase. But I think the best news we’ve seen and continue to see in the data is that the tide is turning. We’ve been through a pretty tough time over the past couple of years. And we think with this wave of construction hitting this year, that will be the peak of vacancy, and then we’ll start to see the improvements. But certainly, there is a lot of variation depending on the market. And we think the impact of working from home is there. We absolutely do not deny that it will certainly have an influence moving forward. BRIAN CHEUNG: Yes, certainly the world in 2022 is very different from what it was at the start of 2020. But Rebecca Rockey, global head of economic analysis and forecasting at Cushman & Wakefield, thank you very much. And Akiko, I just want to point out very quickly here, I’m in the office right now, but you’re not. Then I do not know. Can’t wait to get back to the office? AKIKO FUJITA: I feel like they’re calling me because I’m not in the office. I can’t wait to get back to the office. I’m curious how the lack of flexibility is going to affect this schedule that we’ve all grown accustomed to over the past two years. And I think maybe our newsroom, like a lot of other newsrooms, is very specific in that we operate collaboratively. And so it helps to be all in the same room. It’s interesting. Rebecca noted that the experience might be a little different – more seats awarded, which, by the way, Yahoo Finance is also tracking. So I’m open to experience. I’m glad everyone is back in the office. But what about the days when I want to do other things and have the flexibility of being home so I can multi-task? I don’t know how I’m going to feel. BRIAN CHEUNG: Yes. Well, I mean, the first day when you come back, and you already have to take care of me for over an hour a day in person, so maybe you’re going to want to get home pretty quickly. But we’ll have to see once we get back to the office. AKIKO FUJITA: No, Brian, I like being in the same office, don’t I? BRIAN CHEUNG: Oh. AKIKO FUJITA: And we talk a lot more often when we’re in the same room. It makes for a better show. BRIAN CHEUNG: Write it down. If someone can put us next to each other, we can be best friends. Akiko right next to Brian.