It has taken 2 years for restaurant and flight activity in the U.S. to return to their pre-pandemic levels. The same cannot be said of offices. As of end 1H22 office utility rates are still at less than 50% of their March 2020 levels. Investors are clearly concerned that this may suggest a structural long term change in the demand for CRE. But are these concerns well founded? Or an opportunity?
Investors are looking at different data points to arrive at their projections.
Default rates for CRE Loans have not risen. But this can be explained by the ability of firms to finance the long term leases that they signed before the pandemic.
Higher vacancy rates also give a skewed picture. Whilst newly completed projects in 1H22 remain unfilled, that does not mean that tenants are vacating existing premises or downsizing en masse.
Conclusions can also be drawn from rent growth, which seems to have levelled off. And an increase in sub-letting where tenants are off-loading unused space.
It seems that a long-term structural change in the demand for CRE may be taking shape, alongside the the shift to hybrid working arrangements. The question is how long it will take for this to play out, and what are the options for repurposing any oversupply in CRE. We may end up working from home, in a home that was previously an office.
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