What RTO Mandate? Vacancy Rates Keep Rising
As leases expire, tenants are renewing with smaller footprints.
Even as some form of hybrid work becomes ingrained and accepted, and some of the largest corporate office tenants are mandating a return to the office, the lack of overall physical office usage continues to push tenants to smaller footprints.
What is being commanded by Blackrock, Disney, Amazon, and Google has not done enough, so far, to prevent vacancy rates from rising as leases expire, according to a report from Yardi’s CommercialEdge.
For example, national vacancy rates are up 260 basis points year-over-year and reached 17.5% at the end of August.
It’s particularly problematic in the West, which has seen vacancy rates ise 590 basis points in Seattle and 510 basis points in San Francisco.
Peter Kolaczynski, CommercialEdge Senior Manager, said many people are unwilling to give up that extra time they have become accustomed to each day.
“A higher unemployment rate could give firms leverage in return-to-office conversations, but remote work is here to stay,” Kolaczynski contends.
CommericalEdge’s report analyst Evelyn Jozsa scoffs at the open-office floor plan trend from pre-pandemic.
“It’s out of line with the current needs of office workers and is particularly ill-suited for Zoom meetings, which will continue to be around,” Jozsa writes.
“Organizations will need to adapt workspaces to the post-pandemic world if they want to entice workers to come in. Amenities may help, but designing workspaces where people feel they can be productive will be equally important.”
The office construction pipeline has 108.4 million square feet ongoing as of Sept. 1, accounting for 1.6% of total stock. Boston is the biggest such player, with nearly 14 million square feet of space underway, equal to 5.7% of existing inventory.
“However, developers broke ground on only 996,000 square feet so far this year, representing 7% of the new supply pipeline,” according to Jozsa.
The sale prices for top-tier properties have significantly dropped from $361 per square foot in 2022 to an astonishing $233 per foot, marking a 35% decrease.
“Interestingly, this drop is steeper than the decline observed between 2008 and 2009 for A+/A buildings,” she writes, with Class B properties only falling by 9% this year.