Delta Disrupts Office Return Plans. What Now?

Labor Day was supposed to herald the return to the office. But did anyone say which year/?

The Delta variant has turned the Covid-19 recovery story on its head. The 7-day average number of new cases on September 1, 2021— more than 503,000 — was four times the amount on the same day the year before, according to Oxford University’s Our World in Data site. 

The upsurge has caused some major companies to put off their plans to have employees return to the office. Compounding the situation are labor market pressures for hybrid work models and less time in the office.

“Many employers want their employees to be in the office but at the same time, employees are pushing back for several reasons,” Amber Gibson, vice president at Stream Realty Partners, tells GlobeSt.com. “Most notably, they either have genuine fears for their health and safety or want the ability to work from home permanently because they have been doing so for the last 18 months.” A general shortage of workers gives many employees unusually strong bargaining power. 

All this is bad news for office leasing. Current occupancy rates run from “eh” to grim. Kastle Systems’ back-to-work barometer for the week of August 30 showed a 33.1% 10-city average occupancy rate. On a metro basis, the high was 48.5% in Austin and a low of 19.7% for San Francisco.

Although those figures are based on Kastle customer data, other sources point to similar levels. Data from Cherre pointed to a New York City office occupancy rate of about 20%.

“Occupancy rates ranging from 20% to 50% is an accurate metric and reflects what we are seeing in the DFW metroplex,” Gibson says. “Building occupancy depends on the type of tenancy in the building and its location.”

Stephen Bittel, founder and chairman of commercial real estate services firm Terranova Corporation, expected a post-Labor Day return but says the “Delta surge may well delay that move.” He says he’ll have a better sense this week.

“We are seeing actual physical occupancy around 25% at best,” Bittel says. “It’s hard to measure as people come and go intermittently.”

It could take a year or more for occupancy to recover. “Major metro occupancy rates will not return to pre pandemic levels  anytime soon,” Michael Silver, chairman of Vestian, tells GlobeSt.com. “I estimate occupancy rates at 70-80% of pre pandemic levels by year end 2022.”

As a result, landlords and property managers are trying to determine what they need to do. Top task is communication because better information allows improved planning. 

“Tenants are transparent with their landlords when asked about plans to return,” Gibson says. “Property managers communicate most frequently with tenants and are the eyes and ears of the building. Landlords are relying on their on-site property management and leasing teams to gain insight into tenant plans to return to the office.”

Landlords and developers are modifying revenue projections to accommodate the potential occupancy delay until the end of 2022 “Longer term, landlords and developers project shorter term leases of three to five years and an increased building percentage allocated to coworking accommodations as tenants will continue to seek flexible lease solutions,” Silver says.

Between then and now, expect demands for concessions to increase. “With an uncertain future, everyone seems to be taking a wait-and-see approach to the future of office use,” says Bittel. “Tenants with expiring terms are asking for reductions in their space footprints as they have been succeeding in maintaining their businesses with a remote workforce.”

Silver agrees. “Increasingly, tenants expect 30 % rate reductions, leases of 3 to 5 years, fully developed space paid by the landlord, and space reductions of 30% to 50%,” he says. “The totality of these requests has naturally, at times, increased friction in lease negotiations.” He thinks landlords are meeting the demands halfway, with that continuing over the next six to 12 months.

But while things have been generally “collegial,” so long as the rent is current, as Bittel notes, that could change. “This cannot last forever and the Delta curveball we have all been thrown has delayed a real resolution for the future of office space.”