Important questions we cannot answer (yet) about the office market

The office market continues to experience a number of major structural challenges — adapting to the evolving needs of occupiers who are also grappling with the new ways of working, while managing ageing and ‘stranded’ office assets through the challenges of achieving net zero.

As the industry is changing, there are questions that we still cannot answer. I’m certain that technology plays a critical role in addressing some of them, and that the potential of innovation and digitisation can uncover valuable opportunities for positive growth and impact in the office sector.

Let’s look at what’s currently happening in the industry. Big markets present worrying vacancy, and before even diving into numbers, it’s important to clarify that vacancy does not equal occupancy. We should look both at how much of the space is occupied, and at how much of it is actually leased. This being said, research shows that vacancy in New York is at 16,1%, which means 75.8 million square feet! These are the official numbers.

So what are we to do given that many return-to-office campaigns don’t work in so many industries? What do people understand by hybrid work, what does it look like to them and what does this mean for office spaces?

If the occupancy level remains stagnant, what makes us believe that the office footprint will stay the same? Will tenants lease the same space if their people are not constantly coming into the office? Or are they going to look for smaller, more central, more ESG-focused offices?

The occupied surface might change, and so will — actually, already has — the average break clause. Before Covid, tenants could have exited contracts in the 5th or 7th year. After Covid, the average is a shocking 3-year break clause! A building takes, on average, 1–2 years for planning, 2–3 years to be built, and during this time, it’s getting pre-leased. With a 3-year break clause, this means that when the last floors of the building are leased, the first clients are at the break moment and you, as a developer, have to run constant leasing and marketing activities. How should we deal with this?

Talking about moving to smaller, newer, more central offices, what does this mean for older buildings? Not to mention that after Covid, we’ve seen a new layer of clients for A-class buildings: startups & smaller companies that used to occupy B-class or coworking spaces are now looking for 150–800 sqm offices in new buildings. And they aren’t looking just for an office, they want a personalised experience.

So are we going to see more refurbishments and repurposing? Those aren’t a saving solution for everyone, because they come with several challenges. The most important is related to costs and infrastructure. There are empty office skyscrapers that cannot be turned into homes because the underlying structure doesn’t allow it.

Finally, a question I am personally curious about is: what happened with the biggest investors in the office sector? Why are there articles showing the big guys going from 60% to only 2% of their portfolio being office assets? Who did they sell to? Why did they buy? And, eventually, what’s happening with the office market?