Expert: Office Has Bottomed Out and is Poised for 'Positive Momentum'

The worst might be behind office following the lows of the pandemic. While the asset class is far from ideal for CRE operators there’s hope for key fundamental growth.

Particularly, attendance is starting to improve in major markets. And for the first time in five years, availability levels have gone down, JLL’s third quarter office market dynamics report revealed.

William Sankey, CEO and co-founder of real estate software development firm, Northspyre believes the office sector has “bottomed out” when it comes to vacancies.

THE NEED TO SOCIALIZE

While every market is different he said generally “I think because you have this trend of employers wanting team members to get back together, and in a lot of cases, you have employees wanting to be back together,” he said.

“I do think we’re going to see more positive momentum for Office moving forward.”

The social element is a big factor behind the office revival and CRE operators are adapting. Northspyre, which operates in 80 of the 100 metro areas in the U.S. focusing on a range of CRE asset classes, sees a jump in mixed-use office projects, helping make environments more attractive for employees.

“Think [of an] office next to hotels and restaurants and other types of entertainment,” Sankey said.

Plus, boutique buildings are starting to rise in popularity, from Northspyre’s vantage point.

“You see these, smaller, let’s say, three to 10-story buildings. They’re amenity-laden buildings, and usually, they are in trendy or exciting areas of towns and neighborhoods,” Sankey highlighted.

“You see those are getting more traction increasingly in the real estate development community.”

NEW YORK AND FLORIDA AMONG LEADERS

Some markets including South Florida and Manhattan are leading the office revival. Attendance in The Big Apple was found to be 73.4 percent as busy in August compared with the same month in 2019, according to a report from Avison Young. At least nine in 10 employees are now back in the office in South Florida versus pre-pandemic levels, which leads the country, according to the Fort Lauderdale Downtown Development Authority (FTL DDA). While attendance isn’t still quite what once was, those regions are significantly outperforming the national average, which Avison reports as 60.4 percent.

Sankey noted that Florida and New York are connected in a competitive nature when it comes to the job market. Some might move to each state for different reasons. For example, employees might be more attracted to Florida for its smaller tax burden. Some might favor New York for more liberal policies. But what divides the two states, as Gregory Kraut of KPG Funds put it, is the “level of talent” that gives New York the edge. But both are populated markets that are appealing to employers.

“I think you know when you can look around and you’re in a place like New York or even in South Florida, and you can see your peer companies going back to the office, and you think they might have a competitive advantage,” said Sankey.

And when seeing some workers go back to the office, that makes others that perhaps are unemployed or working remotely in Florida and New York “much more likely to [follow], whereas, in places that aren’t seeing that, they just haven’t gotten that level of momentum,” he added.

It’s unclear if the country will ever return to office occupancy rates we saw before the pandemic. However, employers are ramping up efforts to get work on-site. In fact, nine in 10 firms plan to impose a return to office mandate in 2025, according to a ResumeBuilder survey featured by sister ALM publication BenefitsPro.com.

Most notably, Amazon dropped major news with its announcement that it would require more than 350,000 corporate employees to RTO five days per week, beginning in 2025.

“A lot of companies, are at the very least, returning hybrid, if not like completely to the office,” Sankey said.

THE POSITIVE MOMENTUM WILL CONTINUE BUT OFFICE IS FAR FROM IDEAL

While further supporting his bottoming-out claims, Sankey is taking it a step further and thinks the positive momentum will continue for office as employers demand a RTO. That means higher asking rents and lower vacancies.

But Sankey warned that office is still far from an ideal asset class. He expects other sectors like data centers and multifamily to generate a larger return, at least in the short term.

“I still look around at other asset classes, and I think they probably look more favorable even in like, the next two years than office does,” Sankey said.

Offices can work today – but they need to be in the right environment. Again, think of smaller workspaces in Class A properties surrounded by five-star eateries and entertainment venues like Dave & Busters to attract employees.

Looking ahead, Sankey forecasts that the nation will go through a three-to-four-year period where it stops building a significant of space dedicated to office.