Kastle Chairman: Office Occupancy Will Hit 60%

On the opening day of CREtech in NYC on Wednesday, Kastle Systems Chairman Mark Ein expressed confidence that average US office occupancy levels will reach 60%.

Kastle’s 10-city occupancy average, based on its survey of entry card swipes, stalled at 43% in March—a level it hovered around for the next six months—and then registered a modest bump to around 47% in the weeks since Labor Day.

“It’s been constantly increasing, in a stair-step way, but we shouldn’t focus on the week-to-week or day-to-day,” Ein told Globe St. at CREtech.

“It will get to 60%,” he told us.

Ein said he’s basing his projection on the widespread adoption of hybrid work patterns.

“Hybrid work is a real thing,” Ein said. “Most companies will at least go to three days a week [in the office], so that’s three out of five days—and that’s 60%.”

In its most recent reports, Kastle has begun reporting occupancy levels for specific days of the week.

The company’s October 4 report noted that NYC, which had an average occupancy of 43.5% for the week based on the card swipe survey, recorded an occupancy spike that measured 57.9% on Wednesday of that week.

“We’re already at 60% in some markets on certain days of the week,” Ein noted, adding the caveat that Kastle’s barometer is not a full vs. empty metric.

“Our data is not a test of whether [office tenants] are using their space at all—if it was, it would be at 90% [occupancy],” he explained. “It’s a test of how many of them are using it each week.”

Ein told GlobeSt. that average office occupancy levels will rise as office tenants adjust their footprints based upon whether or not they’re using the space. He suggested that this positive adjustment will come as office leases expire.

“There are people, once their lease ends, if they’re not using that space they’re going to get out—and if they’re using the space they’re going to use more,” he said.

The Kastle chairman predicted that as more workers gravitate to hybrid work from fully remote work, many will discover they want to be in the office more than three days a week.

“I think that when people come back they’re going to realize that they need to be there,” Ein told GlobeSt.

Ein also gave us a preview of what Kastle 2.0 will look like: the proptech firm will begin providing office occupancy averages of submarkets in the major cities it surveys—potentially including block-to-block surveys.

“We’re constantly evolving the barometer, looking at new ways to analyze it and gain more insight from it,” he told us.

“This includes using a much finer lens than a whole city so you can see [what’s happening] in parts of the city or block by block,” Ein said. “That’s something we’re working on.”

We asked him to estimate the impact of the pandemic-induced paradigm shift on overall office sector valuations, which one NYU study has suggested could amount to a drop of $500B.

Despite his positive outlook on average office occupancy levels, Ein conceded that there’s no doubt the impact of this seismic shift will be profound.

“There’s no hiding that it’s going to be meaningful,” he said. “If demand fell by 40% in any other asset class, that would seriously impact the value of whatever that asset is.”

According to Ein, the damage to the office sector will be short-lived.

“I think it’ll work itself out and we’ll be fine, but there will be a significant short-term dislocation,” he told GlobeSt.