by King White, on Jun 20, 2022 1:49:39 PM
The U.S. office market has a long way to go before it recovers to pre-COVID conditions. Many optimists paint a rosier picture of the office market; however, the data points to a much longer recovery of the office market due to labor conditions and long-term implications of work-from-home. The reality is that the office market is years away from fully recovering unless labor markets soften, and employers take a stronger stance on returning to the office. As a result, corporate real estate strategies have become much more complicated as companies try to better understand their real estate needs in the future.
Class A and B office properties are roughly 65 percent vacant and unoccupied
If you have recently toured office buildings around the country, you quickly notice how most parking lots are very empty. According to the CoStar Group, there are approximately 3.15 billion square feet of Class A and Class B office space in the U.S. of which 529 million square feet (16.8 percent) are available for lease. In addition, Kastle Systems, which tracks workplace access activity in the U.S., estimates that as of June 2022 that only 41.2 percent of tenants (average of the 10 largest metro areas) have returned to the office on a full- or part-time basis. Based on this data, the following analysis estimates how bad office market conditions have become.
Class A and B Occupancy
| Square Feet | Percent | |
| Total Square Feet | 3,150,962,000 | 100.00% |
| Vacant (Not Leased) | 529,361,616 | 16.80% |
| Leased | 2,621,600,384 | 83.20% |
| Fully-Partially Occupied Leased | 1,080,099,358 | 41.20% |
| Unoccupied Leased | 1,541,500,426 | 58.80% |
| Vacant + Unoccupied | 2,070,862,042 | 65.70% |
This means that approximately 2 billion square feet or 65.7 percent of Class A and Class B office space are vacant and unoccupied. As a result, landlords should be nervous as tenants have gained the upper hand in negotiations. As pressure mounts on rental rates, investors are looking beyond office to alternative assets such as apartments and industrial, and office building owners are going to be in a difficult position when it comes time to refinance properties.
Over 179 million square feet of sublease space on the market
The next hurdle is how to deal with the glut of sublease office space on the market across the country. There are currently 179 million square feet of sublease office space available with 56 million square feet (31% increase) of that coming to the market since the pandemic began in early 2020. This sublease space is often discounted to attract tenants, which creates additional challenges for landlords as they try to lease vacant space in their buildings.
Over 5.4 million job postings and 3.6 percent unemployment add to the problem
Another major force working against the U.S. office market is labor conditions. The country currently has more than 5.4 million job postings in comparison to 3.5 million in January 2020. The following graph illustrates the peaking trend that continues to plague the labor market:
United States Unique Job Postings
Source: EMSI
Combined with a very low unemployment rate of only 3.6 percent, employees are dictating how and where they will work. Employers are desperately seeking to hire employees which have created a truly national recruiting market as employers are recruiting aggressively hiring work-from-home across all markets. As a result, employers with office space are unable to bring workers back into the office as they have to compete with other employers who are allowing them to work from home. This trend will not change until labor conditions soften.
Potential future black swan events could alter office space trends
If COVID taught us anything, it is that black swan events can change things overnight. A cybersecurity disaster could be the next black swan event that alters the current office market course. For example, if a Fortune 500 publicly-traded company had a massive cybersecurity data breach that was sourced to work-from-home employees, the impact on their stock could send shockwaves and potentially force employers to make employees return to the office.
Time will tell
The recovery of the office market in the U.S. will be a long one. Landlords are in a difficult position and will be faced with much uncertainty by capital markets as they seek to buy, sell or refinance properties. As a result, it will be a tenant-controlled market for office space for the foreseeable future.
