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4/14/20
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This industry update was provided by real estate services firm NAI Capital.
The pandemic has financially impacted tenants, but the full effect on the industry has yet to be seen. Coworking offices are looking like ghost towns as people have been forced to work from home. Technology companies and professional services firms, which made up a significant portion of the recent office market growth, are likely to shrink office footprints. The financial impact on coworking spaces and office landlords in general will likely grow exponentially the longer people are required to distance themselves from workplaces.
The coming quarters will provide a clearer picture of the impact on the office market as the COVID-19 outbreak continues to develop. Looking forward, the office markets in Southern California are in uncharted territory. As office tenants close or severely curtail operations for an indefinite period because of the coronavirus threat, vacancies are expected to rise and rents to be adjusted downward.
NAI Capital asked industry executives “Where do you see the office market headed in the next three months?” Below are the key takeaways of this survey for the Southern California Office Market.
Asking Rents:
68% expect rents to decline as market conditions can’t sustain pre-COVID-19 pandemic rates; existing tenants are requesting some form of rent relief from landlords; vacated spaces will be priced lower.
Sales Prices:
65% believe sales prices will see steady declines as vacancies pile up and panic selling from overleveraged owners depresses the office market.
Vacancies:
79% expect vacancy to increase; downsizing will occur and businesses will close; tenants will default on leases and sublease space will increase.
New Construction:
62% see new construction stopping.
Landlord Concessions:
88% say landlords will offer more concessions to keep tenants; many landlords are proactively re-negotiating leases, offering rent abatement or deferring rent with repayment on a certain date and/or restructuring with blend-and-extend leases.
Leasing Volume:
91% expect leasing volume to decline until some certainty is restored for business owners; tenants will rethink their space needs, including work-from-home strategies to reduce occupancy costs.
Sales Volume:
74% expect sales volume to decline; buyers are looking for ways to accurately price deals; distressed owners will consider selling; properties for sale will remain on the market longer.
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