The Impact of Return to Office: 1 Billion Square Feet of Office Space is Available in the U.S.

As companies navigate the post-pandemic world, the question of returning to physical offices has been a pivotal issue. With hybrid work models becoming the norm, the implications for office space availability are significant. Recent data, including first-quarter 2024 statistics, highlight a transformative shift in how office space is utilized. Let’s delve into these trends and what they mean for the future of the office real estate market.

65% of companies have implemented return-to-office mandates

As of Q1 2024, there is a cautious but noticeable movement of companies returning to office settings. However, the landscape is far from a full return to pre-pandemic normalcy. Hybrid models predominate, with companies often opting for a mix of remote and in-office work. This approach allows for flexibility and has changed the demand dynamics for office space. The following summarizes current trends:

• Percentage of Companies Returning to the Office: Latest estimates suggest that about 65% of companies have implemented a form of physical office return, whether full-time or hybrid. However, only about 30% have returned to the office full-time.
• Impact on Office Space Usage: With the hybrid model, the need for permanent office space has decreased, leading to a higher vacancy rate than historical averages.

Office space availability hits 1 billion square feet

The office real estate market has faced significant challenges due to changing work models. As of Q1 2024, the vacancy rate for office spaces has reached a concerning milestone:

• Vacancy Data: The nation has approximately 1 billion square feet of vacant office space. This marks an all-time high, with vacancy rates surpassing 15% in several major cities and even higher in others.

Depressed office real estate market conditions primarily impacting Class B and C buildings

The biggest trend has been the flight to quality. Class A buildings have been on an upward trajectory of lower vacancy and higher rental rates while Class B and C buildings have been hit hard.

• Vacancy Rates: The high vacancy rates in Class B and C buildings indicate a surplus of office space that isn’t being leased as companies downsize their physical presence or opt for more flexible arrangements. 
• Decrease in Rental Rates: With supply outstripping demand, rental prices for Class B and C office space have experienced downward pressure, which could benefit smaller companies looking for more affordable rates.
• Adaptive Reuse Opportunities: The abundance of vacant Class B and C office space presents opportunities for adaptive reuse. Commercial real estate players are increasingly converting office space into residential units and mixed-use developments.

Capital markets and banks are under significant pressure

Instability in the capital markets has placed banks under substantial pressure to reduce their office-related loan exposure. Estimates suggest that CMBS real estate loan delinquencies could jump to 8.1% in 2024 and 9.9% in 2025.

• Building Valuations: Across the board, office building valuations are easily down 15% to 20% with projections of 25%+ decrease by 2025 compared to pre-pandemic values.   
• Bank Financing: Due to high vacancies and low valuations, banks are reducing their exposure to office building loans as fast as possible. Building owners needing to refinance an existing building or get new financing will be hard-pressed to find a lender. 

The role of corporate real estate advisors

In this shifting landscape, site selection consultants and corporate real estate advisors become even more crucial. Companies looking to either resize their office footprint or optimize their real estate portfolio can benefit from expert advice on market trends, economic incentive negotiations and strategic site planning.

At Site Selection Group, we help companies navigate these complex decisions. Our expertise enables clients to make informed real estate decisions that align with their operational strategies and workforce dynamics. By leveraging up-to-date market data and comprehensive analytics, we provide tailored solutions that address both current needs and future growth.

Conclusion

The office real estate market is currently experiencing a period of significant adjustment. As companies continue to evaluate the viability of returning to the office, the impact on space availability and market dynamics will evolve. With businesses looking to understand these trends and adapt to the new normal, partnering with seasoned consultants like Site Selection Group can provide the insights and direction needed to make strategic decisions.

For more information on how we can assist with your office space needs or real estate strategy, reach out to us today.