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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