The COVID pandemic has created a stark dichotomy in the United States’ real estate market.
The residential and industrial sectors are booming. For example, driven largely by e-commerce, nearly 100 million square feet of warehouse space was absorbed in Q1 2021 — the third highest mark on record. And there are no signs of slowing down.
The office market, on the other hand, is seeing record levels of vacancies. And major cities like San Francisco, which saw its highest vacancy rate since 2005 in the first quarter of this year, are bearing the brunt of the impact.
Of course, the expansion of remote and flex work is a major factor. And, as we have already seen many employers make these arrangements permanent, flexible work options may soon become a standard offering to attract new employees — meaning that the need for office space may continue to decrease.
However, there is another important factor contributing to vacancy rates: a significant amount of new office space was already under construction before the onset of the pandemic. Those buildings have since been completed, but are largely sitting unoccupied.
To put it into basic economic terms: along with having a shortage of demand, the office market also has an influx of supply. In the short term, this will likely force many developers to delay or cancel projects that are already in their pipelines and/or pause the pursuit of future endeavors.
It is hard to quantify the consequences this could have for the industry, not to mention the impact on employment and the supply chain. Some are even predicting that it may take up to seven years for the office market to realize the full impact of the COVID-19 pandemic.
However, it is also important to note that city and state reopenings — which are being done inconsistently across the country — are impacting whether employees are even allowed to return to their offices. And, in a similar vein, many large employers have announced that they will go back to in-person work in September. So, forecasts could look very different come fall.
Although the current state of the office market is grim, I do see opportunities for creative uses of existing, vacant spaces. For example, there has been an emerging trend of office spaces being converted into affordable housing.
The next innovation in repurposing could be right around the corner.
Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.