Obsolescence Equals Opportunity_final (002)

Since the onset of the pandemic, office vacancy has increased across the globe. Since Q4 2019, the overall office vacancy rate is up the most in Canada (+600 bps), the U.S. (+510 bps) and APAC (+487 bps), while Latin America (+226 bps) and EMEA (+157 bps) have seen less than half the increase. Greater China is the one outlier, where after increases in 2020, overall vacancy rates have returned to Q4 2019 levels. 15 In many markets, Cushman & Wakefield expects that vacancy will continue to increase in 2023 before absorption turns positive in 2024. Upcoming lease expirations are poised to place additional upward pressure on vacancy: as noted in Chapter 1, only approximately one-third of U.S. office leases scheduled to expire between 2020 and 2030 have occurred as of the end of 2022, and the office densification trend likely will lead to a reduction of 10%-15%. We expect the vacancy rate in the U.S. to reach 20% by 2024, up from 13% prior to the pandemic. While vacancy mounts, the profile of assets facing trouble will continue to bifurcate as occupiers’ overwhelming preference shifts towards higher quality options. Demand has been targeting an

increasingly smaller portion of current supply, and a mounting portion of current office stock is at risk of becoming competitively obsolete because there isn’t sufficient demand for it. Quantifying the Trouble: Existing and future vacancy is not equally distributed and will disproportionally impact some assets more than others. While vacancy has risen, it tends to be isolated in a smaller portion of buildings. • In fact, buildings with greater than 50% vacancy comprise 7.5% of existing inventory. • In other words, if this portion of high-vacancy buildings were to be removed from the total inventory, then the office vacancy rate in the U.S. today would stand at 12%, as opposed to the all-in rate of 18.2% • As mentioned in Chapter 2, nearly 3.4 msf (60% of existing stock) is in the “middle” group facing competitive obsolescence, while 1.1 to 1.4 bsf (25% of stock) is in the “bottom” group requiring some form of repositioning or repurposing.

CHART 12: VACANCY CHANGE SINCE Q4 2019, GLOBAL REGIONS

CHART 13: VACANCY RATE BY VINTAGE (YEAR BUILT / LAST RENOVATION)

19.0%

2019 Q4 2022 Q3 Change, bps (rhs)

17.6%

20%

800

15.7%

13.2%

600

15%

400

10%

5%

200

1980's

1990's

2000's

2010-2018

0%

0

Canada United States

APAC LATAM EMEA Greater China

Source: Cushman & Wakefield Research

Source: Cushman & Wakefield Research

15 It is worth noting that the pandemic impacted the Chinese economy earlier than the rest of the world and China’s overall office vacancy is still 140 bps above where it was in mid-2019.

The Next Evolution of Office and How Repositioning and Repurposing Will Shape the Future | 21

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