Workers’ reluctance to come back to the office is causing a major disruption in the office space market.
According to the latest data from the office security company Kastle, office occupancy in 10 large cities was under 50% of pre-pandemic rates.
What’s happening: There are two main causes keeping the rate of vacant office space so high:
- Workers just don’t want to go back to the office and employers can’t make them because of the tight labor market.
- Interest rates have risen sharply in the last 18 months, and they won’t be going down soon.
The drop in occupancy, coupled with higher interest rates, is causing the value of office buildings to drop. This dangerous combination means that the owners of expensive office buildings could walk away from them when they have to refinance (typically every 5 years).
Big picture: This will create problems for lenders that are heavy financers of office buildings. They will face losses as building owners walk away from underperforming buildings, and they will be stuck holding office buildings in a down market.
- However, those lenders are well-capitalized to absorb the losses. And the potential pain should be concentrated. Office space makes up only 15% of the entire $21 trillion commercial real estate market, according to Nareit estimates.
- There is a silver lining. Not all commercial space is plagued by high vacancy rates. Buildings in suburban areas are doing well because people are spending more time near their homes.
Looking Ahead: Businesses are still leasing and buying space at strong prices in premium locations with premium amenities and modern spaces to entice workers back into the office.
- Furthermore, industry professionals surveyed by the U.S. Chamber think that more flexible, open, and hybrid-centric office spaces will continue to be a growing trend in office design in the coming years.
- However, there are obstacles to revitalizing core commercial areas and reimagining existing office space, and the Chamber’s Future of the Office survey finds that government red tape is a major barrier to converting empty office space.
Bottom line: The downturn in the office space market should be short-lived. When workers come back into the office more and interest rates fall – perhaps late next year – demand for office space will rebound. One thing is for certain, the future of the office is changing and will continue to evolve as employers entice their workforce back to the office.