Continued strong demand for office space should keep this property sector stable in 2020, according to industry experts. However, the sector will continue to experience disruption from proptech innovations, the growth of flex office space, new product deliveries and worries about a potential recession.
Here are six predictions for office properties in 2020:
Technology tenants will continue to generate the most office demand in 2020, says Jason Burian, managing partner for the Chicago office and leader of the commercial real estate industry practice at CohnReznick, an advisory, assurance and tax firm. “This trend began in the first half of 2019 and will continue into 2020, given projected job growth figures in the technology space and number of tech tenants currently in the market.”
Flexible office will continue to increase its share of total office inventory, but at a slower pace than in recent years, with flexible office providers strategically expanding their footprints, according to real estate services firm CBRE. WeWork's troubles will significantly slow expansion from previous years. In fact, with WeWork active in so many major markets, the office sector's outlook hinges on the WeWork fallout, says Jaime Sturgis, founder/CEO of Native Realty, a Fort Lauderdale, Fla.-based commercial real estate firm. Sturgis adds, however, that this will provide opportunities for homegrown co-working operators to enter some local markets or expand within them.
Lease structuring will change to favor limited downside rather than unlimited upside, notes Brad Greiwe, co-founder and managing partner at Fifth Wall, a Los Angeles-based venture firm focused on “built world tech,” commonly known as PropTech. There will be movement away from the traditional lease model towards management contracts that offer office owners and flex office providers better long-term dynamics and more sustainable business models.
“Expect to see further adoption of certain proptech platforms in the office sector, with more acceptance of these companies and their support of the commercial real estate industry in 2020 than in the past,” says Burian, noting that digital technology will likely be used to enhance occupant experience and artificial intelligence and drones will be utilized for due diligence and construction applications. Technology will also be leveraged to create a consumer-centric, hospitality-like office experience in co-working and flexible office environments, according to Brad Greiwe.
Most investment capital to go to office assets outside central business districts (CBDs) in the new year, notes Burain. Investment capital will also continue to chase new product in core markets and tech hubs. According to Rhett Crocker, president of LandDesign, a design firm with offices throughout the country, office investors will focus on assets in suburban and smaller metros with live-work-play environments, as young creatives and techies are beginning to buy into these “Hipsturbia” markets.
Burain also expects appreciation in office building values to slow in 2020, resulting in lower total returns than in previous years. But property income should remain steady, keeping U.S. commercial real estate an attractive investment option.