Despite Changes, Office Spaces Are Not A Thing Of The Past


Despite many employees working from home and companies adopting hybrid work models, investors are still attracted to the land of cubicles.

While office suites aren’t as packed with workers as before the pandemic, the commercial market remains strong.

“There is investor interest in office properties,” said Stephen Newbold, National Director in the U.S. office of research for Colliers International, a Toronto, Ontario-based global real estate services and investment management company.

“We are at a stage where we can fairly confidently say that we’re not going back to those (2020) levels. It may fluctuate a little, but my overarching view is we are stabilizing on vacancies and space on the market.”

Observers aren’t sure how the new work models will influence the mortgage industry. 

Vacancy rates are declining. Experts expect most workers will return to their desks in some capacity.

In February, the U.S. office vacancy rate was 14.8%, down ten basis points in the fourth quarter and lower than the 16.3% seen during the peak of the Global Financial Crisis from 2007 to 2009.

For 2021, total office sales were $140 billion, up 55% from 2020 and close to 2019 levels, according to Newbold.

The net absorption rate – a key metric that tracks demand for occupied office space – shows movement into positive territories for the third and fourth quarters of 2021.

In the third quarter, 56% of office markets saw positive absorption with the share rising to 61% in the fourth quarter. That compares favorably to the strong negative absorption rates from early 2020 to mid-2021.

In early February, occupancy rates in some metropolitan areas, particularly those in Texas, were higher than in other regions, according to Kastle Systems, a Falls Church, VA, building security firm that studies keycard, fob, and app access data from 2,600 buildings and 41,000 businesses.

Kastle’s back-to-work barometer reported Dallas, Houston, San Antonio, and Austin experiencing occupancy rates from 44.8% to 47.7%.

New York came in at 25.8%, Los Angeles, 30%, Chicago, 26%, Philadelphia, 31.8 %, San Francisco, 21.5 %, and Washington, DC, 29.9 %. The Top 10 metro areas averaged 33%.

While employees are expected to return in person, the way people work in the offices will likely be much different in 2022 and beyond.

“We believe people will come back to the office, but it’s a matter of how long it takes and how we optimize the space usage, which could be as much space as before but just used differently,” said Haniel Lynn, Kastle’s CEO.

Companies are thinking about office designs for more efficient use of space. Because its staff work from home Mondays and Fridays, for everyone to remain in the office, one Kastle client doesn’t plan to use any less space.

On the contrary, it may require additional space because the company wants its employees to be comfortable working together and not overlapping on top of each other.

“It’s not necessarily a material change in volume, but a different way to think about that volume,” Lynn said. 

Phil Ryan, Director of U.S. Office Research for JLL, a Boston, MA, global real estate and investment management service provider, told The Mortgage Note that the real estate industry is preparing for the changes.

“Proactive landlords and developers are taking a more well-rounded approach to their space, focusing not simply on flexibility and workspace utilization, but also technology amenities focusing on employee health, well-being, and sustainability,” Ryan said.

In some cases, owners are creating spec suites or other turnkey products to attract tenants with more flexible and less-structured needs.

Bottom Line: Office spaces are not a thing of the past.

“Offices will remain focal points for collaboration and innovation,” predicted JLL’s Ryan. “That said, they will see significant reworking to better accommodate more fluid utilization trends and a need for more collaborative and meeting space.”

Medium-sized tech-based cities with attractive lifestyles, including Austin, Nashville, and Salt Lake City, have been leading positive absorption.

Overall, Florida markets have withstood the challenges.

For the past three quarters, Atlanta remains in highly positive territories with Los Angeles, Boston, and Dallas experiencing strong fourth-quarter bounce-backs, reports Newbold.

“On a national basis, if we see these (positive) absorption numbers being held in post-pandemic territory, you will see further stabilization in the office market in the first half of the year,” Ryan forecasted.

In a report on commercial real estate trends to watch in the wake of Covid, law firm Katten Muchin Rosenman LLP noted the rise in demand for new, shorter, and more flexible leases.

“This is especially true for smaller deals and current leases, many of which have seen short-term extensions,” the report stated.

New leases weren’t as impacted as expected. More than 75% of new leases signed in the first half of 2021 were for terms exceeding four years.

A quarter were for terms of more than ten years. The percentages were consistent with pre-pandemic levels.

“The full impact of COVID-driven changes in working and space use may not be realized until larger, existing leases come up for renewal or until there is clarity around the extent to which remote working will effect a permanent change in office space usage and, ultimately, demand,” the report explained.

It’s unknown how the changes could affect the mortgage industry.

“My guess is, ultimately, it will be a supply and demand thing,” said Lynn. “As people wonder what demand is, the clients we talk with suggest demand will be there, especially in the higher end of the office market. How they use that space will dictate how much space they use.”