Will office be the buy of the century this correction or is it dead?

Your thesis is way to simplistic to be taken seriously. To make offices an extremely attractive workplace again there should be some material shift in office management by the upper hand. In the same sense that ChatGPT caught some by surprise, something similar should happen to make employees decide that working in an office is way better than WFH. I've seen anything actually: Free food, offices in extremely attractive locations, etc. but nothing would make a sane person want to commute and lose time preparing just to do the work he could do at home. An extremely exaggerated idea but which would help make my point about some type of revolutionary shift in working from office approach would be for companies that want people in the office to offer them low-interest loans or help them finance houses/apartments/rooms that are extremely close to the office and instigate the idea that "We cover this because we want you to be present in the office, so it's a win-win for both". This puts companies in a position where they should sacrifice even more from their side if they want to have people in the office, and in such a scenario, interestingly, even executives will really be put into a naked position by proving their priorities: People in the office vs. saving money (and clearly they'll choose the latter, proving what a marginally low benefit is to have people in the office).

So to share my thesis, I think offices will die and will continue to remain irrelevant unless there is some type of big change in office management/or way of doing business that would require physical presence at least 8 hours a day in an office. 

I think no one wanting to be in an office is a big generalization. I personally hated the office with a passion pre-2020 and nothing you could have said would have convinced me otherwise. I've now been mostly remote since 2020 and look forward to the days in the office. I still would never want to go back to 5 days a week (or even 4), but I think there is a lot to be said about hybrid schedules. There is just something you can't replicate about being in the office. Our team is well set up virtually and have frequent team calls over Zoom, but I still have much more engaged conversations on the fly when we're in the office, and the training for our analysts is still solid over Zoom, but is not what is used to be when we were in the office full time. I think it is really hard to train entry level employees in a completely virtual environment. I learned so much as an analyst just hearing the senior guys take calls with their door open, calling me into the office at the last second, or hearing their group convos. That just does not happen to the same extent virtually and it's really hard to always be thinking about pulling your analysts into all calls when you can't even see what they're working on because everyone is home. Not to mention that I think we can all agree that we would have messed around a lot more as analysts if we were working remotely without someone keeping an eye on us. The analyst life just sucks too much for most people to be focused while being at home but it's a necessary step in our progression. 

Impossible to say how technology changes over the years to improve this, but for all of history we have over hyped how good technology will be and it always takes way longer than we think. For the time being, I think good office will still be utilized to a big extent. I would not want to own 80s office towers in CBD's. Talk about a bad deal today to have to think about getting stuck in a parking garage after work only to sit in a crappy office space all day. 

My shop has one of the largest office conversion pipelines in the country so I will speak on this topic with authority and real time data. I can say with a high degree of certainty that Class B/C office is fucked. 

The folks mentioning supply and demand are right - its not complicated. Office demand has been fundamentally altered and I don't see it returning to pre pandemic levels (in terms of total SF leased) for a long time. Class A properties are fine. Law firms, finance firms and all sorts of white glove businesses will always want prime office presence, that's never going to change. People keep talking about boomers, millennials blah blah blah - certain companies just realized they don't really NEED office space, even boomers. It's as simple as that.

We have bought out over 500k SF of office tenants out of their existing leases in the past year, including tenants like the mf GSA. We only buy historic buildings in downtown cores, so class C or B at best. The process has been far easier than we expected because tenants are typically excited to be released out of their current leases (in most cases with 5+ year terms plus options) to either a) downsize into a significantly smaller space or 2) close their offices altogether. This has included many boomers that have very successful businesses but realized they don't necessarily NEED to have offices for their specific business.

This is the fundamental shift I am talking about. Demand for office, especially class A, will always remain. But overall office demand, has decreased in a real way, and who knows how many years of economic growth, new companies etc it will take to get to that same pre pandemic level of demand. In the interim, shitty office assets are clearly fucked in my eyes so if you want to be the one that catches that knife god speed to you. 

It's funny - everyone on here is making office decisions based on what they like (being in office helps my progression, helps my young people learn, etc.). We all have relatively high-paying, front office careers where responsibility and comp can grow significantly.

The majority of the work force has jobs. Call centers / customer service, in house accountants, in house paralegal, the ops guy that moves money to and from accounts, event coordinators, IT funny enough, etc. Those are jobs - there is no upward projection and that's not those folks' focus. They truly just want to get their job done. They don't expect to learn much. Sure being in the office might help them do their job a bit better due to communication, but not much better. Their goal is to clock in and clock out and make their paycheck.

Not to mention entire organizations that are centered on salespeople that are never going back to the office (marketing and advertisting)

So yes, my view is long term demand for office is fundamentally altered. Being in the office a few days makes sense for some minority of people (including all of us), but not the majority of the labor force

Commenting here with my 2 cents as this is highly topical in the public REIT markets. Large publicly-traded office REITs are now trading at implied cap rates in the 7-10% range (having been trading in the 8-12% range at the most recent lows after the regional bank blowup). Not sure where a generic, REIT-quality (A / A-) office in a major gateway market would trade today, but this is what the public market is telling you they should trade for.

My understanding (and please chime in if I'm totally off base) is that long-run unlevered real estate returns have approximated 8%, and 8% is a pretty common hurdle rate in most RE deals. Your 8% unlevered return is comprised of a combination of yield (cap rate) and growth. If you have large public REITs trading at an 8-9% cap rate, that is the market in a way implying that your long-run NOI growth is going to be flat to negative 1-2% per annum. Given that office leases are long WALT, you tend to only churn about 10% of your rent roll every year, while the remaining 90% gets annual escalators approximating 2%. For that 90-10 math to pencil out to a flat to negative NOI figure annually, the 10% of leases that roll have to do so at such punitive new rents (either blowing out face rents, or offering concessions out the ass to hold face rents that nuke your net effectives) to drag down the entire weighted average. Bumping 90% of your in-place leases at 2% and renewing 10% of your leases at -20% basically just gets you to flat (down 20bps). 

The wildcard here is trying to figure out what proportion of that 10% of your rent roll that comes up for expiry just chooses to either downsize or give up their space entirely, which then becomes a 100% income loss (more on NOI since you've still got fixed costs to cover). This has definitely been a trend post-COVID although it varies wildly by sector and geography. For the publics, occupancies have fallen roughly anywhere from 250-750bps since 2Q20, which is a pretty dramatic acceleration from the run-rate pre-COVID and on par with the period immediately following the GFC

I think part of the problem with the public markets is you're being asked to buy an entire portfolio of assets, and these portfolios can be large and geographically diversified. BXP owns hundreds of assets across several major US metros. Historically, people will just make high level assumptions at the portfolio or perhaps MSA level because you don't have the necessary information (and most people don't have the time) to really try to underwrite a large portfolio on an asset-by-asset basis. I think this is increasingly going to be important due to the ongoing/intensifying flight to quality. Sometimes these portfolios can have some assets at extreme ends of the quality spectrum. Look at SLG and One Vanderbilt. That's probably the best office asset in the entire US. At one point at the lows, you could make a reasonable case that there was enough equity in OVA to justify owning SLG at $20/shr and you could hand back the keys on every other asset with secured debt, and the remaining pool of unencumbered assets could cover the unsecured debt

If I try to think about a bull case for office real estate, I think people will be slow to recognize that the WFH winds are changing. I think we have already passed "peak" WFH, and you are seeing more and more anecdotal information of companies calling people back to the office. It doesn't need to be a full return to 5-day workweeks for office leasing to stabilize or even pick up. If you're running a 3 day per week hybrid model, you still need to have enough space to accomodate your workforce for those 3 days when everyone is in. You're sizing for peak occupancy, not average occupancy. Now layer in how much headcount has grown at some of the large office-using firms in the US, and I think you'll find a situation where they start to call people back, only to realize they don't have enough space to accomodate everyone. This could drive incremental leasing.

Another thing I've been thinking about is how the headline availability stats are misleading. Yes, most major metros are like 20% available today, but that's a hodgepodge of asset quality and if I had to guess, I'd say class B/C makes up a disproportionate chunk of these total availability stats, especially in a place like NYC where the average office asset is like 75 years old. The ongoing flight to quality means that jobs that are going to be in-office for some portion of the week (generally front office jobs) are all going to gravitate towards the highest quality subset of the market and won't be swayed by big discounts at piece of shit suburban office properties. So from that perspective, I can see how the top 5-10% of office assets in a given market can continue to see true net effective rent growth even in a 30% available market, because 25 of that 30% is functionally obsolescent space that nobody will ever touch again, and everyone is fighting over the top 5%. The problem from a private POV is that top quality stuff is unlikely to see real distress, so likely won't come to market. The stuff that comes to market is generally going to be the dogshit (look at the stuff on Cal in SF that traded for like $100psf) nobody wants, so its the curse of adverse selection

Also what I've noticed is that this ongoing flight to quality is shifting office to more of a hospitality model. Because the "default" has been working from your home for the past 2-3 years, offices need to give you a REASON to choose to come in over just staying at home. You're seeing this in office owners adding more amenity spaces, shared meeting rooms, A/V equipment to seamlessly run meetings between in-office and in-home staff, etc. All of this requires large capex dollars and in some cases, is taking previously revenue-producing space and turning it into amenity space. They're doing this to remain competitive, not to be able to meaningfully push rents, so that's a huge increase in your maintenance capex going forward, and office was ALREADY a hugely capital-intensive asset class. We model 30% of NOI going out the door every year in the form of maintenance capex, which is fairly extreme, but its kept us away from buying office for a long time as a result which in retrospect has been a very smart decision.

This doesn't even factor in the long-run thinking about what happens to cities if they let their downtown cores die. The entire model of urban living is centered around the office, commuting into the office from the surrounding areas to work 9-5, spending money locally for lunch, and perhaps going out after work. Office buildings pay a non-negligible proportion of total property taxes by city (I recall looking up which cities are most reliant on property taxes from office buildings but I forget where I found this information). So what do you think happens at a time where city finances are already in the shitter and they need to spend more money than ever to recover from the effects of the pandemic, all while their property tax revenues continue to drop as owners petition for lower assessments? Something will need to be done and sooner rather than later, if these idiots running the cities can see the writing on the wall. The cities will need to do something, whether its tax credits to incentivize office to resi conversion, or forcing all municipal employees back into the office, or something else I cant think of - SOMETHING will need to be done to stem the bleeding, and you have to think whatever that "something" is, has to be an incremental positive for office values.

So really this has just been me regurgitating a lot of the office-related thoughts that have been floating around my head over the past year or so. My gut tells me (again, from a public markets POV) that the office stocks bottomed after SVB collapsed and while you might get a bit of a retracement after this monster short-covering rally they've all had, I think over the next 2-3 years they'll be much higher and this will have been, in retrospect, the ultimate buying opportunity. Everyone is underweight, everyone is short, everyone is pessimistic. I think they have the ultimate wall of worry to climb, but they will do so.