In this year’s second quarter, U.S. businesses signed new leases for about 97.5 million square feet, approaching twice the 57.4 million that marked the low point during the COVID War, data service CoStar reported.
However, the average lease size was 19 percent less than for leases signed from 2015 through 2019.
In 2022, law firms renewing leases or moving to new digs within the same geographic area took an average of 13 percent less space, according to real estate services firm Cushman & Wakefield.
“If a tenant signs a lease for 100,000 square feet and moves out of 150,000 square feet somewhere else, that’s a negative event for the market,” CoStar analyst Phil Mobley told The Wall Street Journal.
The trend to smaller spaces will continue: more than half the leases signed before 2020 have yet to expire.
That will drive vacancy rates even higher, CoStar has predicted.
The U.S. vacancy rate rose from 9.5 percent to 13.2 during the COVID era; the rate will grow past 17 percent by 2027, the firm expects.
Hybrid work policies have been adopted by 61 percent of U.S. businesses, up from 51 percent at the end of 2022, according to Scoop Technologies, which tracks the statistic.
At the same time, the number of firms requiring full-time office presence has shrunk from 49 percent to 39 during this year.
That is likely to be a new normal, Scoop CEO Robert Sadow told the WSJ: newer companies tend to embrace remote or hybrid work policies from the start, while older companies struggle to make the adjustment.
“As older companies age out and new companies come in and offer more flexibility, you’re going to end up with only 15 percent of companies full-time in the office,” he said.
TREND FORECAST: The “Office Building Bust,” one of our Top Trend 2023 picks, is firmly in place.
Despite CEOs such as Amazon’s Andy Jassy and Elon Musk at Tesla talking tough about getting workers back to central locations, office occupancy in the U.S. has remained around an average of 50 percent for months—and tapers to around 30 percent on Fridays. (See “Office Workers Make Friday Part of the Weekend” in this issue.)
The emergence of the digital workplace means that a significant portion of office space is redundant.
Tenants are gravitating toward buildings with greener infrastructure and more amenities such as in-house gyms, as we reported in “Top Trend 2023: Office Building Bust” and subsequent articles.
As a result, thousands of office buildings, especially older ones, across the U.S., are doomed.
Some may be converted to apartments, but only those accidentally suited to financially feasible conversion. Most are not suited, for reasons we explained in “Plan to Turn New York’s Vacant Hotels To Housing Not Working” (5 Apr 2022) and “Wall Street, Dead Street. Office Buildings Going Condo” (28 Jun 2022).
Landlords will be stuck holding many buildings, even newer ones, unable to pay their way. Eventually, the owners will default on their taxes or mortgages.
As we have often noted, the Office Building Bust is decimating downtown retail economies as independent businesses close and chain stores either close or move to the suburbs. (See “Retailers Abandon Downtowns for the Suburbs,” 16 May 2023.)
And we’ll emphasize again that cities are at the bottom of this pile of financial wreckage.
Municipalities will lose a significant share of their property tax base, which makes up at least 40 percent, and often the majority, of cities’ revenues.
Cities may reclaim some of these buildings for back taxes and foot the exorbitant bill for reconditioning them as low-income housing or shelters for homeless persons.
Ultimately, cities will wind up owning portfolios of empty office buildings that no one can afford to keep up.
At that point, much of the remaining properties will be sold for cheap, relatively speaking, and buildings will be demolished to prepare the sites for new lives in a new economy
For more details on the Office Building Bust and its fallout, see our past articles, including:
- “Commercial Real Estate in a Tailspin” (20 Oct 2020)
- “Deloitte Abandons More London Office Space” (26 Apr 2022)
- “GM Softens Back-to-the-Office Requirement After Worker Backlash” (4 Oct 2022)
- “New York City’s Workforce Sharply Shrinking” (24 Jan 2023)
- “Office Occupancy Half of What It Used to Be” (7 Feb 2023)
- “Study: One Billion Square Feet of U.S. Office Space Will Be Empty by 2030” (28 Feb 2023)
- “Remote Work Could Slash Global Value of Office Buildings by $800 Billion” (18 Jul 2023)
TRENDPOST: During the last week of August, office occupancy on Fridays in 10 major U.S. cities averaged 31.3 percent, compared to 55.9 percent on Tuesdays, according to security firm Kastle Systems, which monitors entry card swipes in more than 2,000 office blocks.
In New York City, only 20.5 percent of white-collar workers who would have been in their offices pre-COVID were on site at the end of the week.
What began as “no-meeting Fridays” and “no-Zoom Fridays” has morphed into the first day of the weekend, several New York remote workers told the Financial Times.
“Friday is just a dead day,” Stanford University economist Nick Bloom commented to the FT.
Hybrid work models have concentrated meetings and other team activities on Tuesdays, Wednesdays, and Thursdays. As a result, Friday has become a day to tidy up remaining tasks and then hit the gym or get an early start on family time.
On Fridays, “we just carry our work phones around in case something comes up,” one Wall Street analyst said to the FT.
The “new normal” of blowing off Fridays is part of a larger trend taking hold in other countries.
In 2020, 61 European companies took part in a six-month experiment: they reduced work hours by 20 percent. Some firms let workers choose which eight hours out of the usual 40 they would take off, while most companies simply canceled work on Fridays.
Businesses that participated saw fewer workers quit and revenues jump by an average of a third from the same period the previous year. Ninety percent of the companies said they would stick to the new four-day schedule.
Similar pilot programs are under way in Iceland and New Zealand.
TREND FORECAST: What is most absent in all of the mainstream reporting of the remote work trend are the economic implications of the Office Building Bust which will crash much of the banking sector as building owners can’t pay their loans as a result of losing tenants.