There’s a light at the end of the tunnel. With two approved COVID-19 vaccines in the early stages of distribution, a return to the office is on the horizon. However, it’s unclear what the ultimate impact of the massive work-from-home experiment will be on office occupancies. Some theorize that the office will shift to be the gathering-and-collaboration nexus of the organization. Time will tell what the ultimate impact will be, but it’s highly likely that there will be added flexibility/remote work permanently incorporated into employees’ work schedules.

Recent studies from KPMG, Bloomberg, and others note that CEOs and CFOs want to reduce their footprints and costs. How much — and whether this happens — is an open-ended question. Facebook has publicly commented on having a remote workforce, but throughout the pandemic has continued to lease space across the country. Amazon just announced plans to add 3,000 more workers in the Seaport in a second building at Seaport Square. With this in mind, we thought we would play a “What If?” game and run some theoretical scenarios to determine their impact on office market fundamentals.

We took three baseline assumptions: a 5.0%, 7.5%, and 10.0% reduction in occupancy. We worked from year-end 2019 occupancy figures, as ultimate occupancy decisions/footprint would be based on pre-pandemic levels. In these scenarios, we could expect a 3.1 million SF occupancy decline in the 5.0% scenario, 4.6 million in the 7.5% scenario, and 6.1 million in the 10.0% scenario. During 2020, office occupancies fell 4.2 million SF, or 6.8%, pushing vacancies to 14.7%.

A recent Bisnow poll question put the weighted-average net demand loss at 16.3%, based on the participants listening in to its Boston 2021 Forecast. One-third expected demand to be down 10%, 40% chose a 20% decline, while 19% thought it would be 25%-plus (the balance fell in the 0%–5% categories). Will this come to pass? The weighted-average figure would suggest a 10 million SF decline in demand in Boston, meaning we are less than halfway there. Vacancies would end at 23.4% (using today’s office inventory as the baseline). Historically, office vacancies had peaked at 16.3%, in the aftermath of both the savings & loan crisis and tech bust, and then hit 16.6% in the Great Financial Crisis. A 20% and 25% net decline in demand would result in vacancies surging to 26.8%, or 31.3%, respectively.

We do not think vacancies will approach 23.4%, let alone those higher figures. In such a scenario, rent losses would be substantial, as landlords would have to compete fiercely to attract and retain tenants (rents have yet to show a meaningful decline on an average asking basis during this cycle). Future office development would nearly cease, since deals would no longer pencil save for build-to-suits/preleased projects. Boston’s real estate market would be more akin to a struggling Midwest CBD or suburban-centric Texas markets like Dallas and Houston. That doesn’t feel right to us.

Boston has a diversified economy that has proven time and again that it can adapt to new technology and industry drivers and evolve. Boston remains the top city for NIH funding, is a venture capital magnet, and still maintains an educational and medical ecosystem not found anywhere else. All of this creates new companies that will need to expand their footprints — just look at the growth in the last cycle from DraftKings, Wayfair, and Klaviyo, among others. In addition, the thriving life science market is taking competitive office space out of inventory. Just recently 601 Congress was purchased with plans to go lab; 321 Harrison, soon to complete, will be lab; projects planned as office are shifting to lab — all suggesting that there will be less relative competitive office space.

Real estate is a lagging industry, so there are likely to be additional increases in vacancy throughout much of 2021 before market stabilization late in the year/into 2022. Many companies need to get back into the office before they can make future occupancy plans. And employees are noting heightened work-from-home challenges, loss of productivity, and an inundation of emails/virtual meetings. What was once “fun” in the spring and summer has become a grind. Changing the mindset of “working from home” to “living at work” is profound. Some companies will be surprised by how many of their employees want to be back in the office once it is safe.

About the Authors:

As Research Director | U.S. Capital Markets, Aaron is responsible for all aspects of research within the Capital Markets platform. He synthesizes and interprets a variety of data and information to stay ahead of trends that put our clients in an optimal position to make informed decisions. At the same time, he promotes the Colliers brand via best-in-class research reports, weekly insight posts, thought leadership, and contributions to numerous panels, media outlets, and industry events. With a deep understanding of markets throughout the country, he provides a unique perspective on market dynamics across asset types and investment strategies, providing clients with tailored data and analytics to ultimately guide decision-making solutions.

As a Research Analyst, Dion Sorrentino contributes to the production of the firm’s quarterly Market Viewpoints, as well as managing the distribution of its weekly newsletter, Week in Review. In addition, he collaborates with brokerage and advisory teams on their client work and presentations. Dion assists in managing the Colliers Boston proprietary research database, which contains data on over 360 million square feet of commercial space in approximately 4,000 buildings in the Greater Boston area, encompassing Boston, Cambridge, and Suburban Boston and the insights it delivers. Dion also works with the rest of the research team to provide timely and reliable data that is critical to making effective and well-informed business decisions, including available space surveys and market trend analyses.