Office Market Unlikely to Reach Pre-Pandemic Levels Until 2024

The office market is unlikely to return to pre-pandemic norms until 2024, but a record number of new business startups is expected to be a boon for the sector. 

“With office space, the question is what will the hybrid work environment look like,” Hessam Nadji, Marcus and Millichap president and CEO, told CNBC’s Power Lunch this week. “Will there be less demand for office space per worker/? We believe there will be and that will shrink demand⁠—but at the same time when you have record number of new business startups and economic growth you’ll see new demand.” 

How much new office demand these startups can generate remains unclear though. While some of those businesses will likely need commercial real estate, many will likely be one-person shops that will work out of homes or, perhaps, flexible office space.

Nadji told CNBC that in the long term, “those two factors are going to offset each other, but in the short term you’re going to have these fits and starts when it comes to office space.” 

He said that markets like Arizona and Texas, which are capturing the lion’s share of in-migration of new companies nationally, will benefit most. Nadji noted that in Florida, for example, some markets are having to actually build new office space to keep up.

But in markets like San Francisco, Chicago, and New York City, where vacancies are high and hybrid work arrangements will reduce office space, “the market is really having to depend on future job growth,” Nadji told CNBC. “The business formations that we are seeing are promising, but they have a long way to go to replace the vacated office space.”

He also noted that the average office lease still has three-and-a-half to four years remaining, so owners of office properties “are still financially fine because most tenants have survived and are paying their rent.” But when the leases roll over, questions over usage will come into play.