The office sector has been heavily impacted in 2023 as owners and tenants navigate the “new normal” following the pandemic shutdown. To gain insight into what may lie ahead in 2024, Connect CRE consulted with industry experts who shared their predictions for the future of office space.
One common theme among these experts is that hybrid work arrangements will continue to be a prominent feature of the workplace. Petra Durnin from Raise Commercial Real Estate believes that this trend represents a permanent shift towards maximizing efficiency and fostering creativity and innovation. Adam Showalter from Stream Realty Partners adds that this allows tenants to use space more efficiently, while still prioritizing high-quality assets.
While hybrid work is here to stay, it does not mean employees will be working remotely all of the time. Aarica Mims from KDC predicts that return-to-office policies will continue well into next year as companies determine flexible schedules for their employees. Tony Russo from Lee & Associates agrees, noting a resurgence in return-to-office plans as businesses solidify how they utilize office space post-pandemic.
This ongoing transition to hybrid work models also supports another current trend – flight to quality office spaces. According to Mims, there is high demand for Class A buildings with amenities such as collaborative environments and advanced technology features which enhance overall employee experience.
Scott Morse with Citadel Partners expects this demand for fully amenitized buildings will continue into 2024 due to businesses prioritizing higher-quality spaces over lower-class options which offer fewer amenities or services.
However, despite strong demand for top-tier properties there may be limited supply within this segment due new development projects being put on hold during recent years’ economic downturns.
Eli Randel at CREXi points out an increase in tenant activity coupled with stagnant supply could lead some investors waiting on sidelines until now entering market at better basis than those who paid premium prices five-seven years ago when interest rates were low but competition was fierce.
Capital availability remains a question mark for the office sector, with Morse predicting struggles for investors and sponsors to secure financing for lower-class buildings. However, he also sees potential opportunities arising from this situation as new investors may be able to acquire these properties at better prices and invest in necessary upgrades or renovations.
Randel adds that upcoming maturities could lead to creative solutions such as seller-financed options or private capital entering the market. Showalter agrees that additional sources of capital could fill any gaps left by traditional lenders, especially in Tier 1 markets where high-net-worth individuals are likely to invest.
Overall, while the office sector is still facing challenges and will continue to be divided between top-tier assets and lower-quality spaces, there is some optimism among experts about its future. Office conversions may become more prevalent but not dominate conversation despite being costly projects according Russo who believes upward momentum towards recovery will continue into 2024.
