Low Occupancies, Elevated Energy Prices, High Inflation, Recession: The Four Horsemen Of The ‘Office Apocalypse’

Low Occupancies, Elevated Energy Prices, High Inflation, Recession: The Four Horsemen Of The ‘Office Apocalypse’

Commercial real estate occupancies, valuations and deal-making activities are on a downward spiral as the four horsemen of the office apocalypse ride forwards in 2023.

The first horseman is low occupancy. Office attendance fell off a cliff during the pandemic as lockdowns forced firms to operate remotely, which later evolved into hybrid working. Occupancies have fallen from 95% pre-pandemic to roughly 50%, as employees prefer the flexibility of the hybrid model and push to persist, even though some business leaders strive for a return.

Low demand for space affects valuations and deal-making. US office values fell 45% in 2020, with a long-reduction of 39%, according to a report published by the National Bureau Of Economic Research in September 2022. UK commercial property prices have dropped over 15% since June 2022, according to CBRE. Spooked investors are wary of real estate and CoStar data shows deal-making activity has fallen to a decade low. Real estate funds are underperforming and asset managers such as Blackstone, BlackRock and M&G are starting to limit redemptions after a surge in requests from concerned clients.

The second horseman is the global energy crisis. The rapid rebound from COVID-19 lockdowns triggered a surge in power demand. This was met with throttled supply due to limited production and storage activities during the pandemic and the Russian invasion of Ukraine. Natural gas and electricity prices hit record highs during 2022 and shocks are expected to persist throughout 2023.

Tackling energy costs has become a key focus for real estate executives, with some taking drastic action. ING Groep is closing its Amsterdam offices on Fridays to cut consumption by 150,000 kilowatt hours per month and PwC shut down its UK offices for a fortnight over Christmas to save energy. High bills and continued low occupancies will force firms to consolidate real estate portfolios throughout 2023, fuelling the apocalypse.

The final two horsemen, high inflation and recession, ride side by side, guided by the first two. Macro-economic growth is projected to decelerate sharply, according to the World Bank. Commodity price shocks from pandemic-induced supply chain issues and the energy crisis have caused prices to soar. Policymakers in major economies have raised interest rates to compensate. The higher cost of borrowing is squeezing building owners and landlords, with the cost of debt outstripping rental income in Europe for the first time since 2008.

Banks are starting to prepare for an increase in bad loans as borrowers battle to secure refinancing on their real estate assets upon maturity. Some owners will be forced to sell, which could further fuel devaluations, as happened at the Commerzbank Tower in Frankfurt.

Threat of recession has influenced corporate cost-cutting, particularly in big tech, leading to mass layoffs and an offload of office space. Salesforce announced a 10% reduction in its workforce and a decrease in its real estate portfolio. Amazon is axing over 18,000 jobs and has paused the development of six new US office buildings.

Commercial office space will remain under pressure throughout 2023 even if inflation and energy prices cool off. Landlords will need to invest in their portfolio to attract and retain tenants, even if occupancy rates remain low. Some will need to pursue alternate avenues. Cities are looking to ease residential property pressures with office development programmes. The City Of Calgary has opened an incentive programme to encourage conversions of vacant office blocks, and the New York City mayor revealed recommendations for a similar initiative in January 2023.

The upcoming Verdantix Market Insight: Top Predictions For Smart Buildings In 2023 And Beyond cites the four horsemen as major commercial real estate trends in 2023. Check it out to learn about other trends that property owners, facilities managers and building tenants will need to tackle head-on.