Narayan AmmachchiAmid concerns about the place and profitability of commercial and office real estate in the post-pandemic world, the annual report from SiiLA Brazil, a regional real estate consultancy, will settle no nerves. The office space market in Sao Paulo is crumbling as corporate firms vacating expensive commercial buildings amid an economic turmoil brought about by the COVID-19 pandemic.
In its annual report, SiiLA Brazil says it has not seen the vacancy rate increase so drastically in the past 13 years.
Among the firms that vacated commercial buildings include regional carrier LATAM and Oracle. The airliner was a victim of the tight travel restrictions enforced by governments across the regional and has filed for bankruptcy protection after its aircrafts were grounded for extended periods.
The extended impact of the pandemic has hit companies in Brazil’s most populated city hard with some companies vacating their premises in violation of their lease agreements. Others will wait for their contract to end before leaving and do not intend to renew, the consultancy reports.
The report puts the blame for the increased vacancy rate squarely at the door of the remote-working trend, and the social distancing measures enforced by the government to contain coronavirus.
Real estate players will be aware that restrictions on social distancing will not be ending soon. Despite the success of vaccine rollouts in regional markets like Chile, most of Latin America is struggling to effectively vaccinate their population. According to Americas Society Council of the Americas, only four countries (Brazil, Chile, Argentina and Uruguay) have given at least one vaccine to more than 10% of their population. Brazil is placed second in Covid-19 deaths, led only by the U.S.
Aside from restrictions on movement, the other consideration for companies who would otherwise be renting office space is that the vast majority of their employees want to remain working from home even when the pandemic is over. According to a report by Boston Consulting Group in which 209,000 people were surveyed, 89% “expect their jobs to be partly remote after the pandemic ends”.
To add to the financial burden that companies are struggling under, they are now suffering from the “double costs” of maintaining a workforce at home as well as the various overheads required for their office spaces.
“This whole pandemic time ended up allowing companies to understand better how it would be possible to reduce costs. For some, the choice at that time was to return rented spaces,” stated Giancarlo Nicastro, CEO of SiiLA Brasil in the report.
While many commercial properties are falling vacant, realtors have gone on adding more office space, forcing the industry to cut rent. However, the consultancy doesn’t confirm if the property prices are falling.
Considering the report, the vacancy rate increased from 14 % in December 2019 to 21% in March this year.
While I agree that the office market in São Paulo has bottomed out, pre-pandemic there was not enough premium office space, which is why we’ve seen recent large new developments in areas like Brooklin or other parts of Morumbi. Speaking to family offices on the ground, they are ready to go back to the office as soon as possible. While some will continue remote work, I think the vast majority of companies will go back to an office setting for purposes of control. My guess, probably a 10-15% contraction in the office market in the medium term, which is not bad considering the circumstances.