Landlords have been longing for employees to head back to office buildings in greater numbers. But the national return rate has crept up slowly. For the past three months, it has plateaued at about half of what it was before the pandemic.
Now, a possible recession is making the outlook for 2023 even gloomier. New business searches for new office space, after rebounding in 2021, fell in 2022 to 44% of what they were in 2018 and 2019, according to VTS, a firm that operates a data platform that tracks tenant demand.
Companies are cutting back on office space because they are in a “reduce expense mode," said Ryan Masiello, VTS’s chief strategy officer and co-founder. “Everyone is starting to prepare for a pretty rough 2023."
That prospect may make it challenging for building owners to meet their mortgage obligations, especially with the sharp increase in interest rates. The potential distress could ripple through the financial system. About $1.2 trillion of debt was backed by office buildings at the end of the second quarter, according to data firm Trepp Inc.
Total returns of shares in office real-estate investment trusts, including dividends, are down an average of 45% from February 2020, compared with about a 5% decline for the equity real-estate investment trust index, according to Dylan Burzinski, an analyst with real-estate analytics firm Green Street.
“Office is the worst performing [real-estate investment trust] sector since the pandemic started," he said.
The office industry didn’t suffer during the early part of the pandemic because office leases tend to be for 10 to 15 years. Even though buildings were largely empty in 2020, most tenants continued to pay rent.
But cash flow has declined as lease terms matured and corporate tenants bargained for lower rents or reduced their space. The office vacancy rate was 12.3% at the end of September, up from 9.2% at the end of 2019, according to CoStar Group Inc., which tracks 54 major U.S. markets.
About 211.8 million square feet of sublease space is now on the market, compared with 108.8 million square feet at the end of 2019, the data firm said. The amount of sublease space currently available is the highest amount ever recorded for major office markets, including during the 2008 financial crisis, CoStar said.
Part of the drag on the office sector has come from new hybrid and remote workplace strategies. Many of these plans call for workers to visit offices in the middle of the week and work remotely on Mondays and Fridays.
Since September, the average weekly return-to-office rate has plateaued just below 50% in the 10 major metro areas monitored by Kastle Systems. But in the first week of December, there was a 23.3% difference between the peak day of the week and the low day of the week, compared with a 9% difference in the last week of January.
Even in cities where politicians have urged workers to return to their office, some local officials may be bowing to the new reality of remote work habits. In New York, for instance, the Metropolitan Transportation Authority said in December that it would start reducing subway service on Mondays and Fridays, the two least popular days for heading to the office.
It isn’t all bad news. Companies such as Salesforce Inc., Snap Inc. and Dropbox Inc. that previously told workers they could work remotely all the time are now asking them to return to offices some days or increasing their use of in-office training, meetings and other events. And the recent past suggests some companies will use the beginning of the year to return more workers to offices.
“Since the pandemic, the two biggest calendar events when there’s been a step up [in return to office] have been Labor Day and New Year’s," said Mark Ein, Kastle’s chairman.
Mr. Ein predicted there would be another step up now that the new year has begun, then the new national average will level off again in the 55% to 60% range. “That will be the next plateau," he said.
But even as the return to office increases gradually, companies worried about the economy are slashing jobs. Much of the sublease space coming on the market is from big technology companies like Meta Platforms Inc. and Lyft Inc. that are downsizing.
Job cuts have also started in the financial sector. Goldman Sachs is planning to lay off several thousand employees while Morgan Stanley is cutting about 2% of its global workforce.
“Any continued news related to layoffs or a recession will likely cause more headwinds for the office sector," said Mr. Burzinski of Green Street.
