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Working from home will only temporarily affect demand for commercial office space

The market for commercial office space is in limbo: more employees are working from home on the one hand, a digitalization push with growth in office workspaces on the other. According to Fredy Hasenmaile, Head of Credit Suisse Real Estate Economics, the market nevertheless offers medium- and long-term potential.

May 18, 2022

Many in the business world suggest that companies are taking advantage of the increased number of employees working from home to both save on space in offices and to give up office space. That may certainly be true in some cases, but it's also true that working from home and other flexible working arrangements can lead to a decline in the demand for office space.

This phenomenon, however, is temporary, and the long-term market outlook for commercial office space remains positive. Overall, Credit Suisse real estate economists expect an additional demand of 23% for commercial office space by 2060. There are two opposing trends that are responsible for this expected increase. 

Employment growth will drive demand

Before the outbreak of the pandemic, ongoing growth in employment and increased digitalization in Switzerland led to a significant increase in office workplaces. Employment growth is likely to continue after pandemic-related interruptions according to the study, "Scenarios by Sector for Switzerland and its Regions" from the consulting firms Ecoplan and KPMG, with an expected increase of 10% by 2060. 

But what is even more important for the development of the office market is the long-term change in the world of work from the current push to digitalization. At first glance, this may seem paradoxical, since digitalization facilitates the trend of working from home. But it is also changing our working world and, more fundamentally, the overall economy, which then leads to an even more pronounced shift of jobs to the services sector. And these types of jobs normally require office space. In the long-run then, employment growth and digitalization will increase demand for commercial office space.

Swiss commercial office space market holding up well

In the short term, however, there will also be opposing trends: As a result of future increases in hybrid working situations and more employees working from home than before the pandemic, demand for office space is likely to be 15% lower by 2030, at least temporarily. Traces of this development can already be seen in the market. With the supply of office space currently increasing again, the availability rate rose slightly from 5.5% to 5.8% within a year.

Demand for office space, however, has not yet been so poor – especially in comparison with many foreign markets. A number of lease renewals and also new contracts have been observed in the market. And so far, structural changes have barely been visible. And in the end, ongoing uncertainty about future office space demand also means that only in isolated cases are tenants actively giving up office space or failing to renew their leases.

In addition, during the lengthy normalization process, the important role that a central office plays for communication and particularly for innovation within a company will become increasingly obvious. With time, the drawbacks of working from home will become increasingly noticeable and returning the office will likely gain in importance. As a first step, additional demand, which was estimated to have dropped to around 260,000 m² in 2021, will increase this year to around 360,000 m².

Industry contributions to long-term growth in commercial office space
In percentage points, 2019 to 2060, without the working from home and digitalization trends

 Digitization as a top priority for asset managers
Source Büroflächenmarkt 2022, page 10, Fredy Hasenmaile and Kerstin Hansen, Credit Suisse Investment Solutions & Products Swiss Economics, December 2021

Rental prices trending sideways for the time being

The pandemic has also had an effect on construction activity and investment in new commercial office spaces. They dropped by around 17% in 2021 compared with the long-term average as measured by building permit investment volumes for commercial office space. 

As a consequence of lower construction activity and the demand situation described above, rental prices are sending mixed messages: they sank only slightly in mid-2021, by 0.1% compared with the previous year, but they rose by 1.3% per year on average in previous decade. Figures on lease agreements, however, do not give the full picture. According to reports, special incentives had to increasingly be granted, especially in areas outside central business districts, in order to lease office space. 

Long-term scenario: positive outlook for office properties

As soon as an equilibrium is established between employees working from home and going into the office, the strong digitalization trend will become the decisive growth factor for the commercial office space market. In addition to the current negative impact that working from home is having on the commercial office space market, there are other drivers that have the potential to dominate and even significantly overcompensate for the effects of working from home. 

Apart from the expected growth in employment, the biggest driver of demand for commercial office space will be the changing work world, which with its increased automation and digitalization will lead to more people going into offices.

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