Is the Office Market Heading for a Downturn?


Chuck Schreiber

Solid job growth — as well as consumer spending and business expansion — should keep the office sector in great demand.

 

Usually it plays like this: recession first, downturn follows. We’re hearing lots of talk in the media about a possible recession in late 2019 or 2020 — it may be a false alarm, and it may affect the office sector.

“We could talk ourselves into a recession,” says Richmond Federal Reserve president Tom Barkin. “Some economists have studied the spread of information from a disease perspective, where the information spreads slowly at first but quickly gains steam. I would argue that in today’s media climate, the ‘disease’ spreads faster.”

The Tax and Jobs Act of 2017 has helped propel corporate spending, helping commercial real estate investment remain steady and demand strong. Global investors also continue to be attracted to the stability of the U.S. commercial office sector. According to CBRE, 2019 marks the tenth-straight year of positive absorption, with 37 million square feet expected. Flexible space offices could account for 10 percent of Class A space by 2028.

Some of the downturn misunderstanding stems from the interpretation of the word “cycle.”

Some of the downturn misunderstanding stems from the interpretation of the word “cycle.” Frankly, it’s an inaccurate way to gage the office sector. The office sector does not have a regular, easily predictable cycle. From what I’ve seen, every downturn in commercial real estate has been driven by specific events, such as the mortgage crisis, the dot.com bust and further back, the S&L crisis in the late ‘80s and ‘90s, or simply over-development.

Commercial office properties do not often share the same dynamics as other real estate, such as retail, residential and multifamily. Think of a Class A urban building as an example. If the property is located in a market with strong job growth, good infrastructure, a talent pool to pull from and wide range of amenities, there is opportunity for the property toconsistently perform well if the owner is actively managing it and creating the right set of amenities for tenants in the building to help their businesses to be successful.

Tenants are signing longer-term leases in order to lock-up space in growth-oriented urban markets, and with limited supply, it is unlikely that we will see a downturn in those markets.

Tenants are signing longer-term leases in order to lock-up space in growth-oriented urban markets, and with limited supply, it is unlikely that we will see a downturn in those markets. If a return on a  great property declines, it may be due to mismanagement of a property rather than a macro-economic downturn.

Another investment that is often wrongly associated with downturns: non-listed real estate investment trusts (REITs). Non-listed REITs that focus on proactive management of Class A multitenant commercial office buildings may offer strong cash flow, pricing stability and potential value increase over time. “Late-cycles” and “downturns” are terms that may not apply here. Publicly traded REITs, on the other hand, are vulnerable to swings in the equity markets and discount trading, even though the underlying assets may be performing well and located in appreciating markets.

Solid job growth as well as consumer spending and business expansion should keep the office sector in great demand. Job growth is driving employers to seek more office space. We expect this strength to continue through 2020, with appreciating market values as there is limited office space in prime markets. In fact, during the first two quarters of this year, we are experiencing a re-acceleration in the rental market for select locations.

 

Is the Office Market Heading for a Downturn? Chuck Schreiber2b 1 283x300
Chuck Schreiber is the 
CEO of KBS, one of the largest owners of multi-tenant office property in the United States. 

 

Disclaimer: All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity. Private investments are highly illiquid and are not suitable for all investors.