Office sector to face tough tests when US reopens: Trepp – Trade Observer
As the United States is on track to fully reopen in the coming months and companies scramble to find a way to get employees back to the physical workplace, the office segment seems to be the wild card for everything. the world in commercial real estate (CRE), âwrote Catherine Liu, associate director of research firm Trepp. âThe key questions that need to be answered during this transition process are: As employees increasingly see the benefits of working remotely, how do you create an office environment that will be worth the trip? How will the configuration and space requirements of the offices evolve? What new health and social distancing protocols will have to be put in place? How to strike the balance between allowing flexibility of work and ensuring productivity?
How COVID will change the office as we know it
“While the pandemic was thought to have accelerated the pre-COVID trends that had played out in CRE, the opposite has been observed in the office sector, where de-densification and the exodus out of urban cores have become the standard, pushed by employees fleeing to the suburbs and relocating to areas where the cost of living is lower.
âAs the old adage ‘working from home is unproductive’ has turned out to be false and companies prepare for employees to return to work in person, it is evident that COVID-19 will permanently change the way we interact with colleagues and the role technology plays in how we do business in the future. Employers will continually move away from once-favored collaborative open floor plans and be tasked with optimizing office design to maintain appropriate distance and safety requirements while considering square footage costs. This will likely give rise to new technologies to manage densification patterns, cleaning procedures and workstation usage.
âIssuers withdrew from retail and accommodation lending after sectors became hardest hit by the pandemic and came under intense scrutiny, leading to a increased exposure to seemingly “safer” assets, such as offices, multi-family buildings and industrial mortgages, asset-backed securities (CMBS) transactions issued in 2020. New office issues totaled $ 19.2 billion dollars in 2020 and $ 10.3 billion in 2021 since the start of the year (in June), which represents about 34.8% and 33.2% of global emissions for these two periods, respectively. The issue is up sharply compared to a share of 21.2% and 26.8% in 2018 and 2019.
CMBS issuance by type of property
âThe increase in distress rates in the office sub-sectors has been modest compared to that in accommodation and retail. The long-term nature of office leases has allowed borrowers to maintain their debt service obligations even though physical occupancy declined significantly during the height of the pandemic. The overall delinquency rate for CMBS offices rose from 1.75% in March 2020 to 2.65% in June 2020 during the spikes in delinquency rates last year, the smallest increase among the top five property types for this period. The exception is the industry, which is currently reporting delinquencies that have fallen below pre-pandemic levels. This compares to increases of 23% and 14% in the percentages of delinquency in accommodation and retail, respectively, for the three-month period leading up to June 2020.
âIn April 2021, the delinquency rate for suburban office loans is slightly higher at 3.72%, higher than the rate of 2.1% for all office assets, while only 1.6% of loans from urban offices are classified as overdue. Special service rates for offices also remain low at 2.82% in April 2021. However, the real estate sector will face additional headwinds during the recovery process, with the full impact of the coronavirus on the office sector expected to take. years to come forward and businesses continuing to reassess their need for space once leases are renewed.
CMBS Office delinquency rate
âWhile there is minimal distress for office loans reflected in the services data, there are still recent signs of easing for property type in major metropolitan areas. When examining the most recently reported occupancy rates on open office loans between March 2020 and April 2021, notable declines in occupancy were observed in the top 25 metropolitan areas with the greatest CMBS exposure. In particular, New York (-2.32% decrease in occupancy rate); Minneapolis (-2.3%); Washington, DC (-2.27%); Houston (-2.22%); and the subways of Bridgeport and Stamford, Connecticut (2.16 percent) rank in the top five with the largest occupancy losses. By property subtype, the average office occupancy rate behind outstanding CMBS increased from 91.3% to 90.3% over the same period, while urban office occupancy rates (-0 , 99%) and suburban (-1.28%) fell below 90% for the first time since 2018.
What will the office look like after the pandemic?
âAs the United States plans a full reopening in the coming weeks and the office market recovery is in full swing, there are many unknowns that will need to be addressed as the benefits of remote working and reduced business travel are adopted. in the new office. ‘Ordinary.’ While the greater inventory of space and the potential for lower demand due to hybrid work models will remove reabsorption and maintain a cap on the value of short-lived assets, concerns about the “death of the office.” or the âdeath of the gateway citiesâ have greatly exaggerated. Younger employees starting their careers still largely prefer to engage with colleagues in person, and large urban centers, offering a variety of amenities and cultural attractions, will continue to attract top talent. “