Commercial Real Estate News
Despite Return-to-Office Mandates, U.S. Office Vacancies Continue to Rise
According to CommercialEdge's latest U.S. office market report, despite the attention garnered by return-to-office mandates from prominent companies, office utilization has remained largely unchanged. Remote and hybrid work continue to dominate, with many companies reducing their office space.
While some businesses have tried to lure employees back with perks and incentives, these efforts have generally fallen short. As a result, some companies are now turning to stricter measures. For example, Amazon CEO Andy Jassy announced that, starting in January, workers are expected to be in the office five days a week. Dell has stated that remote workers will no longer be considered for promotions, and Meta has warned employees that failure to be in the office at least three days a week could lead to termination.
Despite these high-profile mandates, vacancy rates and office utilization remain relatively unchanged. Kisi Access Control, which uses aggregated data from office unlocks to track occupancy, reported a national average of 50.2% for the week ending September 30. Illinois (56.1%), Texas (54.7%), and Florida (53.2%) had occupancy rates above the national average, while California (49.2%), Pennsylvania (47.8%), New York (47.2%), and Washington, D.C. (36.6%) fell below. Kastle's Back to Work Barometer, which tracks office badge swipes, showed similar results, with office utilization at 51.4%, consistent with earlier readings this year.
Although many firms are pushing for a return to the office, remote and hybrid work remain prevalent. A recent KPMG survey of 1,300 CEOs found that 83% expect to return to five-day office weeks within three years, up from 64% last year. However, leasing data and office badge swipe statistics continue to reflect a different reality. While CBRE reported that the total number of leases signed in early 2024 was comparable to pre-pandemic levels, the average lease size has decreased by over 25%. Additionally, new job creation has slowed, keeping office demand low. The Bureau of Labor Statistics reported that office-using sectors of the labor market grew only 0.4% year-over-year.
Peter Kolaczynski, Director at CommercialEdge, noted, "With office occupancy remaining persistently low, it highlights the issue of excessive office space. Approximately 20% of the 7 billion square feet of office space remains vacant."
Distressed Office Demand and Rising Vacancies
The national average full-service equivalent listing rate in September was $32.89 per square foot, up 11 cents from the previous month. The national vacancy rate stood at 19.5%, an increase of 170 basis points year-over-year. As pre-pandemic leases expire, many companies are downsizing, leading to rising vacancy rates and increasing distress in the office sector. Austin, Boston, the Bay Area, and Denver saw some of the largest year-over-year vacancy rate increases, with Austin up by 660 basis points, Boston by 610, the Bay Area by 540, and Denver by 400.
Two key tech markets have experienced significant shifts in their development pipelines. Austin and Seattle, which saw steady office development during the first two years of the pandemic, have seen new development slow dramatically in 2023. Layoffs in the tech sector, rising capital costs, and the widespread adoption of remote and hybrid work have contributed to this slowdown. In Austin, 13.8 million square feet of office space began construction between 2019 and 2022, averaging 3.5 million square feet annually. However, since 2023 began, only 1.4 million square feet have started construction. Similarly, Seattle saw an average of 2.6 million square feet of office space begin construction annually between 2019 and 2022, but only 696,000 square feet have been built over the past seven quarters.
