U.S. Office Sector: The Road Ahead in 2021

Although the adjective 'unprecedented' has been largely overused this past year, there really is no better word to describe 2020. It was an unprecedented global pandemic that kicked off the year; an unprecedented one-quarter plunge in U.S. GDP; unprecedented fiscal and monetary policy response; unprecedented work from home surge; unprecedented peaceful and not-so-peaceful protests around the country; and finally, and most importantly, unprecedented speed to a medical solution to COVID-19. As we flip to 2021, and as the vaccines are now getting rolled out to millions each week, we are also beginning to feel, perhaps, an unprecedented level of optimism. The road ahead will be bumpy, in particularly the first few months of the new year, but there is light at the end of the tunnel.

In a series of three snapshots focused respectively on the economy, key office trends, and a 2021 outlook, we explore some of the factors that will shape this calendar year.

Part One: The economy and its impact on the U.S. office sector

Most economists expect the first few months of this year to be difficult as the virus rages on, but forecasts turn increasingly robust after that for two primary reasons: 1.) fiscal support to the U.S. economy is now expected to be much stronger; the latest estimates ranging from $750 billion to $1.9 trillion in additional stimulus, on top of the $900 billion that was agreed to in late December and 2.) after a bumpy start, the rollout of the vaccine is improving. It is now assumed that a vaccine will be widely available to most of the population by mid-2021 and herd immunity will be achieved in the second half of the year. If the vaccine follows the script, it is expected that pent-up demand will then be unleashed, creating very robust economic growth with real GDP growing in the 5% range for most of 2021. From the December National Association for Business Economics (NABE) consensus survey, 73% of economists now expect real GDP to return to pre-crisis levels by the end of 2021.

So, what does this mean for the U.S. office sector? Although most office-using jobs are largely being done from home right now, office employment will be critically important to the office sector recovery when we get to the other side of the pandemic. The U.S. eliminated 1.15 million office-using jobs last year. The low point was the second quarter of 2020 when 2.6 million office jobs were initially cut. Since then, businesses have generally been hiring some of these people back and are creating office-using jobs again.

Normally, coming out of past recessions, we've known that the office sector would eventually follow GDP out of the recession-it was just a matter of time. And when GDP accelerates, that would eventually translate into more leasing, more absorption, and vacancy would fall precipitously until it eventually triggered rent growth. Clearly the office sector is more fundamentally challenged in this recovery cycle-but moving to a stronger economic backdrop is certainly a necessary ingredient to get the office sector on a road to recovery. And, as of now, we predict the U.S. will return to peak office-using employment by the first quarter of 2022.

Does this mean that the U.S. office sector will be fully healed by then? No. The COVID-19 recession caused significant destruction to the office leasing fundamentals in 2020 and that will take time to repair. Moreover, the remote working dynamic will still need to filter through.
Looking ahead, a critical step in the office sector recovery is to carefully monitor 'the return to the office.' Until employees can return safely to the office in full force, it will be difficult to gauge with any precision where the office leasing fundamentals will ultimately level out. The return to the office will be driven by several factors:

• The trajectory of the virus itself and impact on employee confidence;
• How quickly the U.S. can roll out vaccines to the majority of the workforce;
• How quickly schools can reopen;
• How company liability concerns will be addressed; and
• Government policies and procedures.

Be on the lookout for part 2 of 3 in our series: U.S. Office Sector Key Trends