The U.S. office market has reached uncharted territory, Colliers says in its latest national report on the sector. “Following two years of pandemic-driven correction,” the report states. “However, there is considerable debate and speculation regarding the future. The office sector is facing a set of challenges that could result in significant structural shifts over the years ahead.” 

Connect CRE recently spoke with Chicago-based principal Michael Lirtzman for an on-the-ground view of these challenges. Here’s what he told us. 

Q: Although overall office vacancy was higher during the Great Recession, landlords are faced with challenges they may not have seen before. What are some of the essential tactics to minimizing income loss until there’s greater clarity around tenants’ long-term plans? 

A: In 2008, we were dealing with a macro-level financial crisis that had little impact on the occupier side. This time we are dealing with an existential challenge on the occupier side. For landlords, the keys today are to have a complete understanding of needs both short term and long-term, and how you can work with them collaboratively on a solution. It isn’t so much about minimizing income loss in the short term as it is about protecting current in-place income by creating the most flexible and attractive environment that you can, which ultimately protects and enhances long-term value. 

Q: The current glut of sublease space—half again as much as we saw in 2009—represents opportunities for tenants. How might it represent an opportunity for landlords? 

A: In the case of attractive, marketable, long-term sublease space, landlords should see the sublessors as potential partners, and work on joint marketing solutions where the space in question is desirable. In these instances, long-term subtenants are ultimately direct prospects for the landlord. If positioned properly, the landlord can often get involved with a direct lease extension or additional capital to further improve the space for the subtenant.  

Q: Sunbelt markets look to be holding up the best. What are the factors at play that are driving this?  

A: The two trendlines that we have seen that have bolstered those markets are: 1) Sunbelt markets tend to be less reliant on public transportation and tend to be more driver friendly; and 2) those markets also were less impacted by COVID-related shutdowns and restrictions, and as a result office workers tended not to drift as heavily towards remote work.  

Q: What are the prospects for office demand given both the outlook for the economy and the shift toward hybrid working? 

A: Mixed by market and asset profile. Flight to quality is extremely real. Older, lower quality assets will struggle. Sunbelt markets will generally outperform traditional gateway markets in the near term. Perhaps the best news for the long-term prospects of office is that we have seen a trend on the employment side in the past few months – more people are looking for “remote friendly” jobs than there are job postings for remote work. That is a significant change from a year ago. Many employers are starting to show an actual preference for physical office presence.