Embracing the New Normal in the U.S. Office Sector

The office sector is going through a period of change intensified by COVID-19 lockdowns.

Structural changes are underway in the U.S. office sector. As the world moves on from COVID-19, much of life has returned to pre-pandemic norms. Yet work-from-home continues to reduce office occupancy, while demand shifts to more-flexible and higher-quality space.

Office occupancy reached a cyclical low of 81.4% in December 2023, a level not seen since the early 1990s (see Exhibit).[1] Still, green shoots leave some room for optimism, at least for the longer-term. First, employers continue to modify workplace policies almost exclusively in favor of greater office attendance, as remote-first companies have become a rarity.  For more than three months, remote hiring has stabilized at roughly 9% of all postings according to LinkedIn Economic Graph, and 90% of the Fortune 100 currently work at hybrid or fully in-office companies, with an average requirement across the entire index of 3.1 days of required attendance per week.[2] Second, construction is grinding to a halt: Less than 300,000 square feet of space was started in the first quarter of 2024, by far the lowest total in nearly 40 years of recorded data. We project further near-term deceleration in new supply due to tight financing and high vacancy rates. Meanwhile, undesirable office buildings may be removed from the market, reducing vacancies further.


Exhibit: U.S. Office Occupancy and Completions as % of Stock (1990-2023)

Embracing the New Normal chart.png

Source: CBRE-EA. As of December 2023.


Within the overall office market, important nuances have emerged. New and differentiated office properties continue to outperform in occupancy and rents.[2] Office space is also being used differently as the COVID-19 pandemic brought emphasis on more flexibility. Flexible workspace—which offers shorter lease lengths and can include serviced offices, managed offices, shared offices and coworking spaces—is taking an increasing share of the office market.[3] In the past year, the amount of flex space tracked by CommercialEdge has grown to 124.8 million square feet from 113.5 million.[4]

The office sector is going through a period of change intensified by COVID-19 lockdowns. Yet workers are returning to the office, at least for part of the week and supply is evaporating. The road to recovery may be long, but in our view, better-quality buildings, offering amenities, transportation options, and leasing flexibility, appear well positioned to lead the way.

 

Additional Resources

U.S. Real Estate: Risk or Opportunity?

Doomsday headlines may persist, but do not be fooled: The outlook for real estate is getting brighter.

Retail sector shines as the U.S. consumer remains resilient

We believe that structurally tight labor markets and robust household finances — together with low current vacancies and limited new construction — will continue to underpin healthy retail fundamentals for the foreseeable future.

1. CBRE-EA. As of March 2024.

2. JLL. As of March 2024.

3. JPM Research. As of March 2024.

4. Commercial Edge. As of March 2024.

For institutional and registered representative use only. Not for public viewing or distribution.

The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. You may not distribute this document, in whole or in part, without our express written permission.

This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only. It does not constitute investment advice, a recommendation, an offer, solicitation, the basis for any contract to purchase or sell any security or other instrument, or for DWS or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither DWS nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the DWS, the Issuer or any office, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.

The views expressed in this document constitute DWS Group’s judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer.

Investments are subject to risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time.

An investment in real assets involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/ units and their derived income may fall or rise.

War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments.

CIO View