Key Predictions for the Office Sector in 2020
- Jan 16, 2020
Although market fundamentals will remain steady, growth in office-using employment is anticipated to moderate at 0.3 percent, down from 1.5 percent between 2018 and 2019, according to CBRE’s 2020 outlook for the sector. Office completions are expected to soften, yet new deliveries will outpace absorption, leading to a modest increase in vacancy rates. Nonetheless, the tech industry will continue to drive demand in select metros, including Austin, San Jose, Salt Lake City, San Francisco and Nashville.
In an interview with Commercial Property Executive, CBRE Research Associate Rene Moreira provided insights on what impacted the national office market in the past year and shared his predictions for the year ahead.
What shaped the national office market in 2019?
Moreira: Three themes shaped the office market: tech, coworking and amenity wars.
What were the greatest disruptors and innovations in the business?
Moreira: Firstly, the strides made in real estate tech, not just real estate operators investing in PropTech, but also technology that benefits the tenant experience. Secondly, the reality check on the coworking business model. Lastly, the dawn of AI and machine learning for deeper analysis of the real estate sector.
What office markets performed best and why?
Moreira: Performance in 2019, as well as throughout this cycle, was correlated with one main factor in one form or another: tech. Tech companies were the main demand drivers, and San Francisco, San Jose, Boston, Austin and Charlotte were the top five office markets for rent growth in 2019.
Tell us about the possible risks the office market is facing during this late economic cycle. How can investors prepare for a downturn?
Moreira: Deceleration in private business investment and slowing employment growth are the largest concerns for the sector in these late stages of the economic cycle. Investors need to focus on cash flow/income and getting buildings leased, as well as investing in competitive/state-of-the-art products and locations.
What trends will define the business in 2020? What about challenges?
Moreira: Although the economy will cool down, the competition for skilled talent will remain intense. An amenitized, collaborative, healthy office environment will remain the key to attracting and retaining top talent. Coworking, which was witnessing explosive growth in its share of overall office leasing demand, will most likely take a small breather. But we don’t expect coworking will disappear any time soon.
Coworking spaces have been both the highlight and lowlight of the sector. How will the flexible office space business impact the sector going forward?
Moreira: Coworking, while not a new idea, fundamentally shifted its perception. It helps to take a step back and understand what drove the explosive growth of companies in this sector. Certainly, the new coworking model has made it clear that flexibility is something tenants are willing to pay for in a rapidly changing business environment, which as you know continues to be affected by technology.
The sector went from being associated with traditional business professionals in executive suites to offering a trendy, but still professional, plug-and-play space-as-a-service model that now attracts firms other than just those in the creative industries. However, real estate investors had a reality check on the public perception of the value of the coworking business model. They were forced to rethink the office.
What are your predictions regarding the future of office investment?
Moreira: While 2019 office investment decelerated from a year earlier, domestic money remained active and was the primary investment driver. Investors continue to favor industrial and multifamily, and with employment growth in office-using sectors expected to decelerate, competition for tenants will intensify.
In 2020 we should expect some further deceleration in investment volume, but dry powder remains abundant, and there are still attractive investment and development opportunities in markets we expect will weather any deceleration in the horizon, especially markets identified as what we are calling Winning Cities.