Good news is hard to come by in the office sector: A recent Moody’s Analytics report predicted that nearly a quarter of U.S. office space will be vacant by 2026 as remote work trends continue. As vacancy rates rise, office real estate value could be lost by as much as $250 billion.
Such studies predicting destruction of office value have become commonplace in an industry plagued by pessimism. Castle Systems’ Office Occupancy Barometer is the go-to data source for many in the industry tracking the long road back to the office. Castle’s office occupancy data for the 10 largest U.S. metropolitan areas is not encouraging. Office occupancy on Tuesday, the busiest day of the week, is 59.8% of the February 2020 average. On Friday, the slowest day of the week, occupancy falls to about 31.7%, according to Castle’s data.
But not all office market data is doom and gloom. By some estimates, Manhattan’s office sector is starting to recover from the pandemic-induced downturn. Average visits to Manhattan offices rose to 77% of 2019 levels in June, according to survey data from the New York Association of Realtors. The Realtors data was drawn from 350 offices across the city, and the June figure was the highest since the agency first published Pacer.ai data in February 2023.
Other hard-hit office markets, like Philadelphia, are also starting to see a resurgence. Office occupancy in downtown Philadelphia remains low, but other data points to a shift: Ridership on SEPTA, the city’s public transportation system, was up 20% last year compared with 2022, according to data from the Downtown Philadelphia District, suggesting more workers are starting to return downtown.
Mayor Sherrell Parker also recently asked all city employees to come in five days a week, a controversial move that is expected to bring 25,000 city employees into the city full-time, increase foot traffic downtown, support local retailers, and encourage other employers to follow suit.
At the national level, office occupancy trackers other than Kastle Systems also paint a brighter picture. Commercial real estate firm Avison Young recently launched The Office Busyness Index, an interactive dashboard that tracks movement data for nearly 4,000 office buildings across the U.S. The index reveals that 28 of the 41 markets tracked will be busier than they will be in 2023.
Avison Young’s data highlights encouraging insights for major markets. Manhattan’s office occupancy rate was 76.6% in 2019, nearly 15% higher than the national average of 61% for the same period. Manhattan office activity also increased 7.3% year over year. Washington, DC’s office occupancy rate increased 16.4% year over year, while Silicon Valley and the San Francisco Peninsula increased 13.2% year over year.
“The office sector is not doom and gloom,” said Jennifer Rozenak, head of U.S. market intelligence at Avison Young. “There’s some good news and we’re seeing people returning to work in droves,” Rozenak noted. One silver lining is that Mondays are busier than ever in most major markets. “Mondays are now the busiest day of the week for offices,” she said.
Avison Young’s Office Crowding Index is different from Kastle Systems’, and the company believes it is more accurate. The company geofenced office buildings that met strict criteria for size, use, construction date, location and occupancy. It then partnered with Placer.ai, a leader in anonymized mobile data, to apply additional controls to key factors like dwell time to ensure the most accurate picture of office crowding. “Our methodology and controls are unique in the commercial real estate industry,” Rosenak says.
Employers’ push to return to the office has been a long battle, but attendance is starting to normalize, especially as the job market tightens and employees have less leverage. “With RTO policies in place, two- to four-day shifts in the office have become the norm,” says Danny Mungle, senior manager of market intelligence and U.S. office lead at Avison Young.
According to WFH Research, paid remote work days have plateaued at about 29%. That’s a significant increase from 7.2% before the pandemic, but that doesn’t necessarily mean the number will be sustained. WFH Research also found that companies are offering fewer fully remote and fully on-site options than employees would like. By mid-2024, 12% of full-time employees will be fully remote, 61% will be fully on-site, and 27% will have a hybrid work arrangement.
That doesn’t mean the days of full-time office work will return anytime soon — office utilization rates began to steadily decline shortly after the 2008-2009 recession, even before the pandemic. The rise in remote work may be one of the most enduring legacies of the pandemic-era U.S. labor market. But data showing offices are getting busier is welcome news in a U.S. office market awash with bad news.
Property owners looking for a silver lining can combine this with upbeat news on office leasing in the second quarter. JLL reports that office leasing volumes surged 15% compared to the first quarter, reaching nearly 90% of pre-pandemic levels. “While the factors driving the office market recovery remain on track, the long-term nature of office leasing decisions will likely result in a period of gradual recalibration in the near term,” the JLL report noted.
Increased leasing activity from the nation’s largest office REIT also highlights the office market’s recovery. BXP (formerly Boston Properties) completed leasing of 1.3 million square feet in the second quarter, up from 900,000 square feet in the prior quarter. 86% of this activity occurred in Boston, New York City, and Northern Virginia, East Coast office markets that have suffered greatly from high vacancy rates since the start of the pandemic.
As the office market continues to search for stability, there are signs that the bottom may be over. Avison Young’s new Office Crowding Index provides positive insights into rising occupancy rates, and other data suggests the sector’s future may not be as dire as some think. Indicators are mixed across markets, with some data points being positive and others more worrying. There is little debate that the office sector faces unprecedented challenges, but a clearer picture is emerging of where the market is headed.
