Office Utilization Will Shore Up Occupancy Rates

Office has been a spiraling disappointment since so many companies were compelled to close early in the pandemic and hybrid work became a broad fact of business and life.

Vacancies in the property type at the end of last year — just a month ago — were worse than during the pandemic’s height, according to Moody’s Analytics.

Even now, after the early heights of the pandemic, enforced closures, and work-from-home mandates, and after corporations began to reconsider how they would operate, the national vacancy rate reached a new high of 18.7%. The pandemic peak — hit in the second quarter of 2021 and third quarter of 2022 — was 18.5%.

But don’t shoot the messenger. Especially when that credit rating agency has some good news. Well, better news than what has been floating about.

In a new analysis, Moody’s said that utilization is improving and it could help bring people back into the office. Utilization rates of office space is at least, according the firm, improving and could help stave off further collapse of the office market.

“As COVID-19 fades in the rearview mirror, we expect office utilization rates to stabilize between 50-60% of pre-COVID levels over the next two years, as hybrid work arrangements crystalize to have two to three fewer days per week in the office,” Moody’s wrote. “The office sector will continue to lag other commercial real estate (CRE) sectors in the post-COVID recovery, but ultimately return of workers to the office—even part-time—will eventually support performance of office properties in the coming years.”

A key reason is how hybrid work is developing, according to what multiple sources have also told GlobeSt.com lately. The patterns of in-office work tend to include a mutual middle period where people are more likely to find one another, with days taken off falling on Mondays and Fridays.

This is where utilization becomes important. Reduction of office space holdings only works if when fewer people need space to sit and work. But if the reductions only take place at the opening and closing of the week,

“Ultimately, stabilizing utilization rates will make office leasing and tenant occupancy rates recover, even though office is likely to be the laggard sector in 2023,” the firm wrote. “Office vacancy rates will likely tick down after 2023, with construction pipelines diminishing and the number of office-using employees growing in the years following 2023.”

But that could take a few years to become noticeable.