A Look at the Struggling Office Sector in the US
The Covid-19 pandemic may be largely in the rearview mirror, but there is at least one area of the economy that remains ill: the office sector of the U.S. commercial real-estate market.
** What's the Problem?**
Hybrid/remote work: What began as a two-week work-from-home experiment in March 2020 evolved into an entrenched hybrid/remote work environment. Despite return-to-office mandates, office-utilization rates (how many people are physically in an office on any given day) have failed to pick up meaningfully this year and are still 30% to 40% below 2019 levels for most office markets across the country.
Employers shedding space: This has led employers to shed office space, sending the amount of available space for lease shooting up to historic highs across most major U.S. cities. Availability rates are hovering at 25% on average compared with slightly above 15% before Covid.
** Who's Hurting the Most?**
Coastal U.S. markets: Many coastal U.S. markets, like New York and San Francisco, felt the brunt of the pain early on. The things that make these cities great—culture, entertainment, density—ceased to matter as much in a locked-down world.
San Francisco: A prime example, San Francisco's office market has reached an availability rate north of 30%, the highest in the country. This is due to its reliance on the tech industry, which has been more open to hybrid work and has recently seen layoffs and reduced growth plans. Additionally, San Francisco faces quality-of-life issues like crime, homelessness, and affordability, deterring businesses and foot traffic.
New York: On the other hand, New York has started to find its footing. Its office-utilization rate is much higher than San Francisco's and its diversified economy, with a large financial-services presence that requires in-person work, has helped.
** Potential Solutions?**
Office-to-residential conversion: Converting vacant office space to housing could address housing shortages and affordability issues, but challenges remain. Structural differences, zoning regulations, and cost hurdles make large-scale conversions unlikely.
New office development restrictions: Local governments could restrict new office development to avoid further supply/demand imbalances.
Incentives for existing buildings: Incentives could encourage landlords to upgrade older buildings with modern amenities to attract tenants and improve occupancy rates.
Government support: Government incentives could help owners invest in necessary upgrades, but funding and taxpayer concerns pose challenges.
** The Road Ahead**
Finding solutions to the vacant office space problem won't be easy or quick. Cities that act first with thoughtful policies will be better off in the long run.