An Office Shortage?

We’ve all seen the headlines of the flailing office market. One estimate shows that $800B of office valuation in nine key global cities, 26% of the total market, could be wiped out by 2030. Another study estimates a 32% decline in NYC office values, or $500B in value destruction.

While it’s true that office buildings are still suffering from high vacancy, visits to Class A+ office far outpaces visits to lower tier office buildings.

With more offices being repurposed or demolished than built, we could actually experience an office shortage, especially at the top end of the market.

CoStar recently reported that new offices, aged 0-3 years, currently represent about 200M SF, or 2.4% of the office market. By 2027, that number could fall to 100M SF, or less than 1% of the total office market.

While the pandemic forced remote work for many employees, employers now want their employees back in the office.

A brand new, amenity filled office is a great way to entice people back. Even in a challenging office environment, these spaces are still seeing demand.

The office is experiencing a flight to quality, and it’s estimated that the strong demand may actually lead to a future shortage of prime office space.

The Rise of Envy Offices

As an example of this flight to quality, a NY Times article recently highlighted the rise of the “envy office”. These offices boast cozy, Instagrammable spaces to lure back employees. Turns out social media envy from your peers beats working at home in your PJs.

Offices are now taking a cue from hospitality, creating spaces that feel more inviting and similar to living spaces.

Instead of the tech-bro offices with ping-pong and beer on tap, companies are now intentionally designing offices to reflect their brand.

In order to bring employees back to the office, companies were forced to create spaces that their employees would love.

The Retail Comparison

If this story of creating Instagrammable experiences sounds familiar, it’s because we’ve seen it before - in retail!

First, there were the cries of the death of shopping malls and retail. E-commerce was going to put an end to physical shopping.

Except that it didn’t!

Shopping malls and retailers had to adapt and provide a better in-person shopping experience to keep customers coming back. Instead of simply having aisles of products for sale, retailers were forced to create shopping experiences to pull customers into the store.

In office, we are seeing a similar trend as Class A buildings are providing high quality amenities and experiences for tenants.

The data confirms this demand for Class A office. A Cushman and Wakefield study found that Class A office leasing activity from 2015 to 2020 accounted for 67% of the market. Since the pandemic in 2020, the demand for Class A has increased to 74% of the total leasing activity.

Just as e-commerce created a shift in how people shop in person, the rise of remote and hybrid work has created a shift in the way we work. Many companies believe that there is value in having employees in the office, and they have been forced to redesign and upgrade the work environment to fit the current needs or desires of the employee.

Key Insight →

The office market is experiencing a flight to quality. Just as we have seen in retail, top quality assets that provide a better experience for the end user are outperforming. Retail isn’t dead, and neither is the office. Office tenants, just like shoppers, are showing that they will show up and pay more for a better product.