For the global office sector, shrinking demand will pressure the credit outlook. According to an S&P Global Ratings report published this week, a resurgence of COVID cases, along with commuting and safety concerns, have delayed the return to office, and employees are settling into rituals of remote work. Despite increased vaccination rates and a lower death rate from COVID, office utilization remains low globally.
“We expect office landlords to face several years of slow growth, with weaker prospects for leasing and fewer new development projects,” says Ana Lai, an analyst with the ratings agency who covers office real estate investment trusts (REITs). “Pressure will mount as leases expire. Tenants are reconfiguring the workspace to adapt to the hybrid work model, leading to an overall reduction in footprint in many cases. As a result, landlords will likely need to keep rent concessions high to attract tenants, pressuring profit margins and cash flow.”
According to the report, leasing volume remains 15 to 20 percent below pre-pandemic levels in the U.S., and a portion of the upcoming lease maturities will be at risk as tenant demand remains soft. Still, the impact of remote working will be gradual given the prohibitive costs to end a lease prematurely.
The report, “Property In Transition: Slowing Economies And Shrinking Demand Pressure The Credit Outlook For Office Landlords,” published Sept. 12, 2022, is available to subscribers of RatingsDirect on CapIQ. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (212) 438-7280 or sending an e-mail to [email protected]. Ratings information can also be found on S&P Global Ratings’ public website by using the Ratings search box located in the left column at www.standardandpoors.com.
This report does not constitute a rating action.