The pandemic has created concerns for landlords, with great uncertainty over whether the downturn in other industries would propagate to office-based companies. Debate has also flourished over the likely role of the office after the vaccine has been rolled out.
Employment growth was expected to slow even before the pandemic struck. In early 2020, Statistics Norway predicted an annual increase of 0.9 per cent, down by 0.7 percentage points from the year before. This forecast was naturally downgraded immediately the scale of the Covid-19 outbreak had been grasped, and the initial estimate after the first lockdown was a decline of 2.3 per cent. As activity recovered in large parts of the economy, the forecasts became more optimistic. The latest Statistics Norway estimate is a fall of 1.6 per cent in employment for 2020 and a rise of 0.7 per cent this year.1
The economic downturn has been not only less dramatic than initially expected, but also very sector-specific. While last year was brutal for travel and restaurants, for example, developments in IT, finance and public administration were the opposite. A common denominator for many of the sectors which have managed well in the pandemic is precisely that they are very office-intensive.
Preliminary calculations indicate that less than one per cent of office jobs in Oslo were lost in 2020, and much of that decline will already be reversed this year. Few things are more important for the office market than that the companies occupying such property do well. This is reflected in space absorption. Although that was slightly negative last year, it was far better than we feared last April. We expect demand to resume growing this year.
Since developments have been much more favourable than feared, we expect office vacancy to peak at 7.5 per cent in 2021. That is 0.9 percentage points below the previous forecast, but still 0.7 percentage points above the last prediction before the pandemic broke out.
The letting market was very hectic in the last quarter of 2020. Despite low activity in the second and third quarters, the overall volume of signings came to 638 560 m² last year.2 That was lower than in 2019, but surprisingly high given that the volume of lease expiries is very low in 2021. Looking ahead, the prospects for a high level of activity are very good since many leases expire in 2023.
In addition to concerns over cyclical trends, the property sector has been characterised by the discussion over how a permanent increase in remote working would affect office demand. Although it is still too early to draw conclusions about what the world will look like when the pandemic is over, the signs so far are that the outcome will in any event be less dramatic than many feared.
Another topic which has been raised is the desire among tenants for more flexibility. According to figures from Arealstatistikk, leases awarded in 2020 have had an average duration of five years.3 This is actually a little higher than the average for the past decade. Flexibility is undoubtedly high on the wish list for tenants when negotiating new leases. But everything has its price, including flexibility. When all is said and done, the signs are that tenants are still willing to make a commitment in order to keep rents down.
However, much anecdotal evidence suggests an increased use of options and get-out clauses. In many cases, such solutions help to bridge the gap between a wish for more flexibility on the one hand and a desire for the lowest possible rent on the other.
1 Source: Statistics Norway
2 Source: Arealstatistikk
3 Source: Arealstatistikk