Office Vacancy Rises Due To Remote Work
USA – A recent report from Moody’s Analytics revealed that office vacancy levels in the United States have increased due to remote working.
In April 2022, physical office usage reached 40.5 percent relative to pre-pandemic levels in 2019. This is the highest on record since the US Centers for Disease Control & Prevention confirmed the first local COVID case in 2020, based on Kastle System’s Workplace Occupancy Barometer.
According to data compiled by Moody’s Analytics, office physical utilisation rate has been increasing in the last two years, with dips due to three COVID-19 variant outbreaks – January 2021, September 2021, and January 2022.
“In the first quarter of 2022, a lot of large firms finally began implementing their long-delayed return-to-office plans. As these plans ramp up, we expect office physical utilization to climb at least in the short run.”
“However, a multitude of surveys and early indications from initial post-COVID-19 work arrangements, it is likely that some workers will average around two days less in the office, which may ultimately form somewhat of a fuzzy ceiling at around 60 percent, with continued wide variance by office market, firm industry, and individual job type.”
Amidst the increase in physical usage rates of office space, it’s unsurprising that office vacancy across the US dropped marginally, hitting 18.1 percent in the first three months of the year, which is 40 basis points lower than the pandemic peak of 18.5 percent in Q2 2021.
However, office vacancy rates in “superstar cities” such as San Francisco and New York continue to edge higher, even though their office utilisation levels have been recovering.
Moody’s Analytics explained that “office vacancy reflects the aggregate need for space in a market relative to office stock, and that can be influenced by a tenant’s expectation of their worker’s office utilization rates.”
“In other words, tenants expecting substantially reduced office utilization – whether from less personnel needs in a typical downturn, or more remote working after the pandemic – will shrink their space. But tenants will likely renew leases if they expect their employees to return to the office soon, even if they haven’t quite stormed back as of yet.”
However, the downsizing trend was more evident in more expensive office markets. In Q1 2022, office rent hit US$72.88 psf per annum in New York, but only US$27.70 psf in Phoenix. Occupants in expensive markets like New York and San Francisco tenants may often be more financially motivated to reduce workspace if it’s not actively utilised.
Still, Moody’s Analytics clarified that hybrid work arrangements don’t necessarily result in higher office vacancy levels, at least in the short run. If all employees are required to report on the same days, office space demand may not necessarily fall. This is good news and provides some hope for office landlords.
