Office Demand Unlikely to 'Ever to Revert in Full'

Holidays and extreme weather conditions prompted a typical seasonal office demand slowdown in December, according to the VTS Office Demand Index (VODI). However, the year-over-year decline for the month was slightly larger than in previous years.

New demand for office space ended the year 31.3 percent below its May 2022 peak and fell 20.7 percent year-over-year to a VODI of 46 in December.

The report said that a tight labor market, layoffs, threats of another COVID-19 variant, and interest rate hikes have “given pause” to prospective office tenants.

Nick Romito, CEO of VTS, said in prepared remarks, “The reality is that the outlook for the U.S. economy is still unknown, and expectations of a recession continue to loom large in 2023. Where the economy heads will be the through-thread for office demand decisions as we head into the new year.”

Romito said a silver lining is a significant momentum in return-to-office trends. “Continued momentum in return-to-office will undoubtedly provide a tailwind for office demand in 2023 and beyond,” he said while acknowledging that “realistically, it seems unlikely to ever revert in full.”

A weekly report from Kastle that measures office worker occupancy showed the national average of 49.5% of workers were in the office compared to pre-pandemic. The Kastle measurement has not exceeded 50% since COVID-19 set in.

Tech Layoffs and Potential Recession Won’t Help

Doug Ressler, business manager, Yardi’s Commercial Edge, tells GlobeSt.com that office-using sectors of the labor market lost 6,000 jobs in December, according to the Bureau of Labor Statistics, only the second monthly decrease since the onset of the pandemic in early 2020.

Financial activities gained 5,000 jobs in the month, but information lost 5,000, and professional and business services lost 6,000. Year-over-year growth for office-using sectors has rapidly decelerated in recent months.

Office-using employment growth will further decelerate as tech layoffs bleed into 2023 and a potential recession loom. Between January 2021 and July 2022, office sectors added an average of 117,000 jobs a month. In the last five months, they have averaged only 25,000 jobs per month.

“Even as some firms become more forceful in bringing workers back into the office, many have fully committed to hybrid and remote work policies,” Ressler said. “This will be another year of uncertainty and change in the office sector as it moves toward a post-pandemic status quo. Significant change will depend on the duration of the recession, rising interest rate stabilization, and the acceptance of a hybrid or pre-pandemic work model.”

Remote Work Makes Office Leasing Picture is ‘Hazy’

Lanie Beck, Northmarq Senior Director, Content & Marketing Research, tells GlobeSt.com that the outlook for office leasing is a bit hazy right now, with many factors influencing tenant demand.

“Merger and acquisition activity, and the resulting consolidation of physical space that often occurs, can impact office demand,” she said. “Layoffs too can alter a tenant’s need for space.

“But the remote work trend has been one of the primary drivers in recent years, and for employers who haven’t mandated a return-to-office, they’re undoubtedly evaluating both their short and long-term needs for traditional office space.”

Businesses to Delay Long-Term Office Lease Decisions

Jonathon Blackwell, Managing Partner of Arkhouse, a hedge fund taking a private equity approach to public market investing, tells GlobeSt.com that over the past few months, he’s seen an increasingly risk-off approach from institutional real estate investors and lenders alike, as they wait to see what the impact of upcoming FOMC meetings and quantitative tightening will have on an already uncertain economic landscape.

“A slowdown in short-term office demand within the broader market backdrop is not surprising as businesses are less likely to make long-term decisions in the face of increased short-term uncertainty,” Blackwell said.

“We feel it is too early to say what office demand will look like beyond 2023, as the largest variables driving the outcome are yet to be determined, but also expect businesses to delay long-term office lease decisions until there is more certainty.”

Desired Space Shrinks by One-Fourth

Creighton Armstrong, National Director, Government Services, JLL, tells GlobeSt.com tenants committed to leases in 2022 leased space that was, on average, 27% smaller than their prior lease.

However, despite the smaller average, the overall volume of space leased held steady between 2021 and 2022 due to a slightly higher number of deals closed.

Seattle Office Demand in Hibernation

Bret Jordan, president of the Northwest region at Ryan Companies US, tells GlobeSt.com that office demand in Seattle went to sleep in July of 2021 and hasn’t yet awoken from its slumber.

“We’re seeing the large layoff announcements oxygenating the smaller scale and start-up companies’ labor choices, so we are expecting office demand to awaken mid-year,” Jordan said.

“The caveat is that demand will be smaller in nature given the past cycle was full of giant demand deals. This is a reversion to our norm and not a fundamental shift in the underpinnings of our region.

One data point supporting this is the net new demand for residential, he said.

“While again lower in total than the heady pandemic years it remains resilient and in excess of the foreseeable supply,” Jordan said.

Minneapolis to Seek New, Amenity-Rich Assets

Peter Fitzgerald, vice president of real estate development at Ryan Companies US, tells GlobeSt.com that despite the downward trend of office demand, he expects an unprecedented flight to the newest and amenity-rich assets in the Minneapolis-St. Paul market.

He said that new construction is leading the market with several buildings 90%+ leased. One example is 10 West End. Ryan Companies sold the Class A office building in St. Louis Park, Minn. to Bridge Investment Group.

“The building opened in January 2021, in the thick of the pandemic, and experienced nearly 300,000 square feet of leasing activity until it was sold in November 2022,” Fitzgerald said.

Office Tours Increasing Significantly

Chicago-based developer Bob Wislow, Parkside Realty, tells GlobeSt.com that while winter months can sometimes put a damper on real estate tours, especially in colder climates like Chicago, he hasn’t seen a decrease in activity this year.

“Tour requests at all five of our office buildings have significantly increased this month, with one seeing the highest level of activity in years,” Wislow said.

“Companies that need new space because they are expanding operations or have a lease expiring are looking at all options available to them because they know their office space represents more than just a place to do work.

“With hybrid schedules becoming the norm, it’s more important than ever to offer a dynamic environment that promotes collaboration and engagement and provides the amenities and conveniences workers want in exchange for their commute. It also helps to be in an area that is buzzing with activity, as that energy and vitality can’t be recreated in a remote setting.”

South Florida Worker Office Occupancy 60% to 70%

Tere Blanca, founder, chairman, and CEO of Blanca Commercial Real Estate, tells GlobeSt.com that across South Florida, there is a “tremendous” return to the office, especially across the finance sector and it seems that three to four days a week has become prevalent in many industries.

“Because Miami, Fort Lauderdale, and Palm Beach (South Florida in general) is experiencing such constant, amazing migration, with the demographics very strong, many companies are moving here and whatever contraction we might see is mitigated by new buildings being created,” Blanca said. “There is quite a bit of new product in the pipeline to deliver over the next three to seven years; whatever is available right now is getting leased.”

She said buildings are seeing employee occupancy at 60% to 70% in most cases.

“The reality is, even before COVID, when a building was leased out, you still never had full occupancy, Blanca said. “This was from people traveling, being out for meetings, having a family situation, etc. This is why parking garages can oversell by 15% to 20%.”

Offices Need Tech Modernization

Katie Klein, North America Country director at WiredScore, tells GlobeSt.com that what people look for in an office has changed.

“To bring employees out of their homes and back into the office, office landlords must provide appealing properties and spaces. One way to do this is to provide the technology platform that modern office tenants require,” she said.

According to WiredScore’s North American Office report, only 38% of offices are considered advanced ‘smart offices,’ yet 80% of employees state they would be more inclined to go to the office if their building had smart technology.