Slammed Office Sector Won’t Show Revenue Growth Until 2025, Researchers Say

Offices are the most battered sector in U.S. commercial real estate. Their value and revenue have been shrinking since the COVID-19 pandemic. According to real estate research firm Green Street, office revenue, mostly derived from rents, will continue shrinking until 2025, and beyond that, gains will be pretty paltry.

“There will be a slight recovery in 2025—the sector will no longer be going down,” said Dylan Burzinski, Green Street’s chief analyst for the office sector, in a webinar.

A major problem confronting the office sector is that too few workers are returning to the office, with hybrid policies the norm (they go to the office for a few days, then work remotely on the others).

Occupancy has dropped 30% since 2019, the year before the pandemic, Burzinski noted. “Leasing activity is subdued, and tenants are evaluating” whether they will shrink their rental space, he added. An analytical report his team prepared concluded that “activity is unlikely to pick up soon.”

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One problem is that before the pandemic, too many office buildings were constructed, so what’s called “negative absorption” is bedeviling the industry. In other words, there is an over-abundance of totally vacant or only partly occupied buildings.

On the plus side, demand is good for newer office buildings, given their more modern amenities. “Obsolete inventory may be removed from the market over time, though this isn’t likely to materially change the overall supply landscape,” the report found. Also, very little construction is underway, and supply growth of office space should advance just 1% for years, the firm contended.

Indeed, those investing in offices via real estate investment trusts have suffered: Office REITs fell 38% in 2022 and, through November, were down almost 15% this year, according to Nareit, the trusts’ trade group. Offices have a worse share performance than all other REIT groups.

By Green Street’s reckoning, revenue per square foot (which the firm dubs M-RevPAF) will be down 4.3% this year, compared with 2022. Next year, the loss will be less, down 2%. Only in 2025 will the number turn positive, with a gain of 2.4%. After that, though, growth will be even more tepid: 1.7% in 2026 and 0.7% in 2027, the firm estimated.

Not helping the outlook is what Green Street terms “macro uncertainty,” namely questions about economic growth, inflation, interest rates and the like. Insufficient debt financing for office buildings is another headwind.

On a regional basis, there has been some growth, albeit from a low base, in revenue in New York (the nation’s largest office market), Boston and the Sun Belt, generally. The West Coast and Washington D.C. are “still pressured,” the report indicated.