Office Footprints Being Realigned with 'Actual' Usage Levels

Hybrid work emerging as the standard practice for many companies and it’s proving stickier than originally expected, according to a new report from Marcus & Millichap.

A reduction of in-office work hours has complicated companies’ long-term space leasing decisions, the firm said.

“As leases end, many firms are choosing to reduce their footprints to better align their space with their actual usage levels,” according to the report.

Marcus & Millichap points out that companies are often negotiating for shorter lease terms as they assess current and future space needs.

“More volatility with tenants could hinder property values going forward and encourage buyers to target buildings that are not only highly occupied but also have longer leases and multiple tenants,” according to the report.

This changing utilization, together with the addition of about 78 million square feet in 2023, is contributing to what will be a fourth consecutive year of vacancy increases, Marcus & Millichap said, and older Class A assets push up the sector’s vacancy rate.

Following the trend, employers are recruiting for fewer fully remote roles, and entry-level positions are migrating toward being fully onsite to facilitate training, according to the report.

Phil Mobley, National Director of Office Analytics at CoStar Group, tells GlobeSt.com he expects all these trends—stable utilization, slower employment growth, and adjustments to occupancy footprints—to continue for the foreseeable future.

“With over half of the leases executed before 2020 yet to face an expiration event, this will challenge office fundamentals for some time to come,” Mobley said.

He added that several consistent contributing trends have emerged in the office market over the past 12 months.

“The first is that, after a small post-Omicron rise, average office attendance has stabilized at 50% to 60% of per-pandemic norms, with midweek peak days perhaps 10% higher,” he said.

“The second is normalization in the office-using labor market. Private-sector office-using payrolls grew by less than 1% year-over-year through September 2023 after growing about 5% in the prior two years. Rates of voluntary quitting have also fallen back below where it was entering 2020.” Third, he said, is the response to these conditions in the office leasing market.

“Since mid-2022, quarterly leasing volume has consistently been 17% below its pre-pandemic historical average, driven by average lease sizes that are 20% smaller,” Mobley said.

“This has resulted in another 60 million square feet of negative net absorption, bringing the total amount of space tenants have given back since early 2020 to nearly 180 million square feet—almost as much as the entire Denver office market.

Doug Ressler, Business Manager, Yardi’s CommercialEdge, tells GlobeSt.com, “Remote and hybrid work have become entrenched, but many large firms — and the federal government — have been moving forward with return-to-office mandates.

Ressler believes that one of the most impactful return-to-office mandates could soon arrive from the federal government, potentially boosting the Washington D.C. market, which consistently sees below-average office utilization in Kastle’s Back-to-Work Barometer.

Marc DeLuca, CEO and Eastern Regional President, KBS, tells GlobeSt.com that while hybrid work policies have become popular over the last few years, there is ample evidence that employers and their teams prefer in-person work to fully remote scenarios.

“Most employees want to come to the office at least some of the time—especially for collaborating, camaraderie, and a sense of belonging and teamwork,” DeLuca said.

“The fact that office vacancy is lower in Class A properties demonstrates that companies today are choosing well-located, higher-quality assets with desirable amenities to help bring their teams into the office.”

He said that suburban office properties’ increased occupancy since the pandemic is supported by companies wishing to reduce commute time and expense for their teams as inflation has risen.

“These trends highlight the ongoing value of premier office space in key markets throughout the country for today’s firms,” according to DeLuca.

Kurt von Koch, CEO, FM:Systems, tells GlobeSt.com that the U.S. is still hovering at around 9% to 10% of utilization, whereas pre-pandemic it was more like 40%. Germany, much of Western Europe, and the UK are hovering at around 25% to 26% utilization.

India has experienced a 216% increase in utilization from where they were prior to March 2020. Hong Kong and Singapore are also seeing more people coming into workplaces.

“What our workplace occupancy data has continued to tell us over the last 3+ years is that every organization is using their workplaces a little differently.

“Yes – hybrid work seems to be the most popular work model of choice as of late, but there’s not one specific work arrangement or even floor plan that fits every culture.

“This is because each company has their own unique set of evolving needs and priorities and because the way people work best varies.

“For a few companies, fully remote work, and occasional opportunities for getting together works well. For some, everyone back in the office five days a week is ideal – though perhaps offering some flexibility on the exact time. And for most, a hybrid arrangement is working best.”

In South Florida, Tere Blanca, Founder, Chairman, and CEO of Blanca Commercial Real Estate tells GlobeSt.com that companies are continuing to renew and expand, prioritizing finding a balance between office and remote work.

“While vacancy rates have risen in other major US markets, they have remained stable or even improved in solo locations due to new market demand and a strong local economy. Building occupancy levels are above the national average. Nationally, some buildings are only at 50% occupancy as people return to offices, but in South Florida, it’s around 65% and above.”