Office Tours Spike 28% As CRE Gears Up For Labor Day Return To The Office
In major office markets across the country, potential tenants have been eyeing space more than at any time since the outbreak of the coronavirus pandemic over a year ago.
Office demand in major U.S. markets jumped by 28% from February to March, according to a monthly report by VTS, a software provider for commercial real estate landlords. VTS’ Office Demand Index increased by 160% in the first quarter and now sits at 86, 9% less than where the index was in February 2020, leading the report to conclude that “return to work appears imminent.”
VTS’ index is largely based on the number of office tours conducted by potential tenants in a given market, and its reported increase in demand has not translated into a boost in leasing activity quite yet, according to research from Colliers.
“[Q1 was] just a continuation of what we had experienced the past few quarters,” Colliers National Director of Research Steig Seaward told Bisnow. “Tenants are slow to return to the office. Nothing has really changed.”
The same is true of in-person work — employee occupancy rates have only inched up over the first four months of the year, according to card swipe data from Kastle Systems. Office usage across the 10 largest markets in the U.S. averaged 26% in the week ending April 21, only a couple of percentage points higher than the rate in mid-January.
Rubenstein Partners has experienced a notable increase in tours of its offices, especially in the suburbs, Rubenstein Partners Sun Belt Regional Director and Director of Equity Capital Markets Read Mortimer said, adding that leases are “just starting to get signed.” A decent chunk of the touring and leasing activity so far has been from companies that were already seeking space in the months leading up to the pandemic resuming that search.
“Covid happened, and everybody said, ‘Whoa, we've got to figure this out,’" Mortimer said. “And some of those same requirements have started to poke back up.”
His words echoed those of VTS CEO Nick Romito, who on Bisnow’s Make Yourself At Home podcast on Friday attributed the boost in tours to “pent-up demand.” The increase in tours hints that companies have a level of certainty that offices will return to relevance at some point soon.
With the vaccine now widely available, the national infection rate in decline and the economy having turned a corner, it stands to reason that companies see more stability to make long-term planning easier than it has been since the world was thrown into disarray. But there is still no certainty over when a sufficient portion of the population will be inoculated for social distancing measures to be removed, and no one knows how workers will react once directed to return en masse.
“I think the goal posts on that mindset have shifted,” Seaward said. “Earlier in the pandemic, people were saying, ‘When we’re all vaccinated, we’ll feel better about it.’ But now, only half the country has taken a leap and gotten vaccinated, and the other half hasn’t. … Until people truly feel comfortable returning to the office, they’re not going to. And I don’t know how much longer that’s going to take.”
But many in the industry think the picture is becoming clearer: With a summer that promises to be chock full of vacations just around the corner, Labor Day has the look of a popular signpost.
“Across our portfolio, whether it’s corporate tenants, law firms or investment banks, Labor Day seems like the outside date for returning,” Mortimer said. “A lot has coalesced around the push for returning.”
With the third and fourth quarters traditionally being busier in terms of office leasing, a Labor Day return will likely correspond with the first big wave of leasing activity since 2019, Seaward and Mortimer agreed.
“[A post-Labor Day bump] makes total sense to me, and I would expect it," Mortimer said. "For now, some people have high degrees of conviction that they need firms back in the office, and those people are acting now. But there’s another group of people who really want to wait until they’re absolutely certain. So I would suspect we’ll see another wave of demand injection before the end of the year.”
The return of workers will likely have to precede a true recovery in office leasing, as many companies will use their first weeks back to test drive whatever hybrid work schedules or revamped office layouts they put in place before they commit to a new lease.
“Because we’re not back in it and all the conversations are more theoretical, everyone is going to have to see if [their plans] are going to work,” Seaward said. “I think it’ll depend company to company and sector to sector, but I do think it’ll take a little more time once we get back into the office to assess what works and what doesn’t work. Do we need more collaboration or conference rooms or less, for example.”
Another factor in the increase in tours is that this year will essentially represent two years’ worth of lease expirations, considering how many short-term extensions were signed last year when so little was known about how the pandemic would play out.
“[Short-term extensions] were a deferral of demand and not a loss of demand, so you are going to have some pent-up demand that could help boost market activity over the next 12 to 24 months,” Mortimer said, noting that many extensions were for two to three years rather than just one.
Though Romito is one of many who believe that new hygiene standards will reverse the years-long trend of increasing employee density, the ubiquity of remote work still portends a reduction in office space that several large companies have already announced. As some companies relocate and leave behind larger blocks of space than new companies are willing to fill, vacancy will likely increase even as leasing activity picks up, Seaward said.
“I anticipate that vacancy rates will continue to climb probably until mid-to-late 2022," Seaward said.