Is The Office Space Sector In Crisis Mode? It Depends On Who's Defining It

The Oxford Dictionary defines a crisis as “a time of intense difficulty, trouble, or danger.” While few would argue with this compact definition, Oxford offers an alternative that would be even more pertinent to today’s commercial real estate (CRE) investors. The secondary meaning, “a time when a difficult or important decision must be made,” has become a baseline rallying call to any organization whose assets and investments are tied into today’s staggering market.
The debate over the word crisis continues today regarding the office space sector and what investors should plan, shift or change as we head into the second half of 2023. 

No doubt, at least for the general public, some of the news headlines this week would want to make any casual CRE investor head to their storm shelter. Take, for instance, statements from Kiran Raichura, the U.S. deputy chief of property economics for Capital Economics, who says the best-case scenario is that CRE will “recover at a painfully slow rate from its deepening downturn as office buildings go out of fashion.” 

While you only have to drive through the downtowns or financial districts of cities like San Francisco or Washington, D.C. to realize there are a lot of empty office buildings around, apparently, the weight of Raichura’s warnings have put business reporters in a stir with a headline like “US commercial real estate probably won't recover from the office space crisis until 2040.”
London-based Capital Economics refers to itself as an independent economic research business. Still, its statements this week suddenly caused the negative vibe of the office space sector to look even dimmer going forward, with Raichura saying that the work-from-home trend and high-interest rates will mean office values are unlikely to rebound for another 17 years.
"It's very easy to see values take much longer to get back to those levels, and actually, the growth rate we've assumed to get back to the peak after the size of the fall we're expecting over the next few years is higher than the rate in the last 10 or 20 years," Raichura said and then put more gas on the fire by adding, “it's quite possible to see that recovery take much longer than the 15 years that we've penciled in and it could be well into the mid-2040s even.” It should be noted, however, that Raichura is bullish on retail properties, which he predicts will see a rise in value over the next five years.
While most investors are hardly making future decisions based on the opinion of one forecaster, and due to the fact there are some steals out there for those with cash on hand, it’s possible we haven’t reached scorched earth yet. Take, for instance, the opinions this week of accounting giant PWC.
In its midyear outlook, PWC agreed that office space is currently in a relative free fall, affected by the “ongoing evolution of how people live, work and play in a post-pandemic world.” They also reported that office leasing was down 68% due to a slower-than-anticipated return to the office, growth in sublease inventories and lease expirations.
However, it’s important to note that PWC is concurrently avoiding defining the current economic environment by employing the “C” word. “We believe the sector is not in a crisis, as successful dealmakers will find opportunities, with green shoots evident across all subsectors, including the much-maligned office subsector.”
Terminology differences aside, everyone can agree that CRE asset managers and investors, especially those who focus on office space, have some big strategic decisions to make in the second half of 2023. 

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Downtown San Francisco Image by Vladey Meer from Pixabay

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