Office Occupancy Ekes Out Gains As Demand Dips

Office occupancy is trending in the right direction again, but gains are slowing as demand for office space dips further from its pandemic-era peak in late summer. 

Average office occupancy in the largest 10 U.S. metro markets ticked up to 30.1% for the week ending Jan. 19, a rise from 27.9% during the week before and 17.5% at the end of December, according to the latest Kastle Back to Work Barometer, which tracks swipes on the company's access controls at 2,600 office buildings nationwide.

Every market that Kastle tracks was up for the week, led by metro Chicago, up 3.6 percentage points, and New York and Philadelphia, both up 3.5 percentage points. Metro San Francisco had the smallest uptick, gaining 0.7 percentage points for the week.

Even so, average occupancy in the 10 markets remains far below the 40.6% peak in early December, just ahead of the omicron variant of the coronavirus. The rate of recovery is also slowing, according to Kastle. The week ending Jan. 12 saw a 4.6-percentage-point increase, and occupancy grew by 5.8 percentage points the week before that.

The latest VTS Office Demand Index reports that new employer demand for office space dropped in December with the onset of omicron and is now 58% of pre-pandemic demand. 

Since peaking last August at 87% of pre-pandemic demand, the index has fallen for four of the past five months, including 5 percentage points in December. The index tracks unique new tenant tour requirements at office properties in core U.S. markets, both in person and virtual.

"Given that December is typically an underperforming month, I would’ve expected a greater decline than what we experienced this month,” VTS CEO Nick Romito said in a statement. “However, despite a better than usual end of the year, looking ahead into 2022, I expect bruised sentiment to continue to materially impact demand for office space.”

Other office observers are more optimistic about the outlook for 2022. Demand for office will rebound from depressed pandemic levels long before demand for retail properties once Covid-19 becomes less of a risk, real estate mogul Sam Zell told CNBC on Tuesday. Not all boats will rise with the tide, however. 

"Obsolescence is a big factor in the office market, and I think it’s gonna make some assets unsaleable without significant investment,” Zell said.

Even though hybrid schedules are the new norm among office workers, companies aren't cutting back on the amount of space they take when they sign a lease. Only 1% to 2% of employer respondents to a new survey by the Harvard Business Review said they were cutting back-office space usage.

One reason is that employers are reducing worker density rather than square footage. The increasing densification of the office of the 2010s, in other words, has reversed, and workers want more space around them.

"Discomfort with density is here to stay, according to our survey evidence," HBR reported, adding that worker demand to work from home on Mondays and Fridays also offers only "meager opportunities to economize on office space."