Obsolescence Equals Opportunity_final (002)
• Vacancy: Shown in Charts 5 and 6, CoStar data depicts a similar flight to quality over the past few years. Office buildings designated as 5-Star represent essentially the same share of total inventory (12%) as pre-pandemic, but account for a decreasing portion of overall vacancy— from 10.4% in Q4 2019 to 9.1% in Q4 2022 (see Chart 5). Moreover, the gap between 4-Star and 5-Star vacancy has widened, more than doubling from 410 bps in Q4 2019 to 970 in Q4 2022 (see Chart 6). Extending from the analysis on the Top segment, which comprises 15% of all Class A product, the remaining 85% of Class A space—not to mention all of Class B and C space—has not garnered positive absorption since the pandemic began. As occupier demand recovers, some of it will shift down the value chain towards the next level of Class A space, but a significant portion of what was considered Class A prior to the pandemic will Further context on the Middle
remain. The bulk of the "next layer" of demanded space is not highly differentiated, and it will need to evolve to meet the growing demand for experiential office. This process will be similar to the period of adaptation and evolution that unfolded throughout the retail sector (both throughout the built environment and among occupiers and retailers’ strategies) over the past 15 years. The shift most certainly caused short-term pain, but it ultimately improved the market, leaving it stronger (albeit very different) than it had been prior to the Great Financial Crisis and the rise of e-commerce. A similar dynamic also exists across Europe. The European Commission reports that 42% of non residential buildings throughout Europe were built before 1970, with only 9% of that stock having been renovated. As a result, a significant percentage of office inventory needs to be renovated or repurposed to fit what the market needs.
CHART 5: 5-STAR OFFICE BUILDINGS’ SHARE OF INVENTORY & VACANCY
CHART 6: VACANCY RATES FOR 4-STAR & 5-STAR OFFICE BUILDINGS
Inventory SF Vacant SF Total
5-Star
Gap (bps)
4-Star
12.5%
24%
1,000
12.0%
11.5%
20%
750
11.0%
16%
500
10.5%
10.0%
12%
250
9.5%
9.0%
8%
0
2021 Q1
2021 Q3
2021 Q2
2022 Q1
2021 Q4
2019 Q4
2020 Q1
2022 Q3
2022 Q2
2020 Q3
2020 Q2
2020 Q4
2011 Q1
2017 Q1
2012 Q1
2021 Q1
2015 Q1
2013 Q1
2018 Q1
2016 Q1
2019 Q1
2014 Q1
2010 Q1
2022 Q1
2020 Q1
2022 Q4 QTD
Source: Cushman & Wakefield Research analysis of CoStar Group data
Source: Cushman & Wakefield Research analysis of CoStar Group data
16 | OBSOLESCENCE EQUALS OPPORTUNITY
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