Office Demand Continues Its Slow Climb

Office workers may not have yet returned to the office—but data from the first quarter of this year shows that demand is beginning a slow upswing.

Data from Kastle Systems, which installs security systems in office properties showed that just 27.8% of employees in 10 of the country’s biggest cities worked from an office during the week of May 12, down from pre-pandemic stats of 92.4% in early March of last year. In cities like San Francisco and New York, which had the most restrictive lockdown policies, just 15.6% and 17% of office workers were back in a physical office during that time. Cities in Texas, which opened sooner than many other states, tended to fall in the mid-40% range. Contrast that with CBRE data from April which showed that 65% of people surveyed said they’d started returning to the office, up from 58% in January.

“We’re going to see an office market that’s going to take probably at least a couple of years to find its footing again,” Ian Anderson, CBRE’s head of research in the Americas, told Trepp. “There’s no doubt about it, more people are going to be working remotely,” he said. “People are not going to be coming into the office every day of the week anymore. That is absolutely going to pressure demand and a lot of office market fundamentals across the country to the downside.”

But against that backdrop, demand is improving. Trepp analysts note in a recent report on the state of the office sector that office tours in major gateway cities like Boston, Chicago, Los Angeles, New York City, Seattle, San Francisco and Washington, D.C. increased by 28.4% between February and March, a number that’s still down about 15% from averages recorded pre-pandemic.  And the level of renewals—which made up about 70% of leasing activity—indicate that at least for now, most companies are staying put. 

“As Trepp highlighted earlier this year, the glut in office space in both New York and San Francisco is a byproduct of the pandemic-induced distress that will require long-term observation,” Trepp’s Tim Casey noted. “The New York City office sublease market has seen a large number of additions, with the amount of available space up 47% at the end of 2020.”

Experts tell Trepp that while the figures are encouraging, demand is not likely to hit pre-pandemic levels in the near future. Lease terms are significantly lower than pre-pandemic norms, and the US office market recorded 37.9 million square feet of negative absorption last quarter, the second-worst showing since JLL began tracking the sector 21 years ago.

“There’s a lot of very encouraging economic sentiment out there that tends to be very helpful for office demand,” Scott Homa, JLL’s senior director of office research, told Trepp. “But companies need to get their bearings around flexible work and long-term plans about work-from-home before we start seeing big, substantive, long-term decisions being made.”