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Office Occupancy Hits New Milestone As Employers Regain Leverage

A softening labor market and more enforcement of return-to-office policies have brought urban workers back to their offices at the highest level since before the pandemic, offering a glimmer of good news to landlords and downtowns nationwide.

For the first time, the occupancy of offices in the 10 biggest U.S. cities eclipsed 50% of their pre-pandemic average, according to data collected for the week ending Jan. 25 by building access technology firm Kastle Systems.

Over half of office workers reported back to the office in January.

“It was a big milestone, but it was expected from our perspective,” Kastle Systems Chair Mark Ein said in a phone interview. “Since the pandemic receded enough for people to return to normal activities, when it came to return-to-office, the tension was between employers and business leaders who generally want their people back, if not all the time, at least some of the time because they realize the value of that, and employees who generally were enjoying working from home.”

But the weakening economy, perforated by announcements of mass layoffs, especially in tech, has started shifting the balance of power back toward employers, giving them leverage to get employees in the door — a change that some CEOs predicted last year, but that was slow to materialize.

“And now the economy has tailwinds and [employers] felt a real imperative to make sure their businesses are running as effectively and productively as they could,” Ein said.

Some CEOs, such as Starbucks' Howard Schultz, Salesforce's Marc Benioff and The Walt Disney Co.'s Bob Iger, have issued orders for workers to return to the office or at least adhere to hybrid work schedules under the threat of termination.

"We've seen sort of a little bit of a shift,” Damla Gerhart, Avison Young principal and managing director for Chicago, told Bisnow last month. “Let's say that you've been working under a hybrid policy for the last year, but they haven't really been enforcing it. Now they're saying, ‘OK, we have this policy, we're really going to start enforcing it with a bit more rigor.’”

The biggest drivers of the increase were tech-heavy markets San Jose, where offices saw a 2.9% occupancy bump over the previous week, and Austin and San Francisco, where occupancy rose 2.6% each. San Francisco’s office occupancy on Jan. 25 was 45.9%, according to Kastle, while San Jose offices were 41.1% occupied.

Under the surface, though, the reasons for the increase in these markets, especially San Francisco and San Jose, can be attributed in part to a quirk of statistics. Because office occupancy there has been lower than most major metros, the growth rate shot up at a faster pace, Ein said.

In addition, torrential downpours that washed over Northern California in the first weeks of January kept people at home in greater numbers, Colliers San Francisco Research Director Derek Daniels said. When workers made a regular return after the storm clouds parted, it led to a jump in office occupancy.

But even in Silicon Valley, executives have begun applying more force to get their workers back at their desks.

Kastle Systems Chairman Mark Ein, who also owns the Washington Kastles tennis team.

The most famous example is Twitter and Tesla boss Elon Musk’s directive to employees to return to the office, or else. Musk received weekly reports at Tesla detailing which employees were in the office, Fortune reported in September.

Apart from Musk’s tactics, the job market in the Bay Area grows more difficult every day, as layoffs keep coming, particularly from big tech firms.

“All of that infuses into the local mindset,” Ein said.

Plus, when compared to mid-December Kastle data, both Bay Area cities posted big jumps in mid-January occupancy, Daniels said.

“There’s been a push, really since fall,” he said. “It’s taking a long time to get there, but I think we’re above the mid-December return-to-office. So that’s the comparison that I would use because the holidays kind of messed things up, and then the rain.”

San Jose and San Francisco offices were 36.6% and 41.8% occupied during the week ending Dec. 22, according to Kastle.

Nationwide, Tuesday is the most popular day for people using the office, with occupancy at 58.6%. Chicago, Houston and Austin all saw occupancy above 60% last Tuesday, with Austin reaching 76.9%. Offices were occupied on average at 34.9% on Fridays, the least popular day for workers to commute.

The difference between the days is greatest in New York City, where offices are 26.5% occupied on Fridays and 59.8% occupied on Tuesdays, per Kastle data. Manhattan's largest office landlords have taken issue with Kastle's data, claiming the firm doesn't track the most modern towers.

The Partnership for New York City, which tracks a different sample of office buildings, found occupancy is now between 53% and 55%, while Kastle data pegged average occupancy at 49.5% last week, the New York Post reports.

Across the 10 metros surveyed by Kastle, office occupancy hit 50.4%, an increase of 0.9% over the week before. Office owners take a variety of factors into account when determining the health of the market, but this milestone, coming nearly three years after Covid’s onset, indicates the grating climb made by the office market overall.

Driven by the desire to boost productivity and profitability in the face of economic turmoil, office tenants seem to be pushing ahead at last with their return-to-office plans.

“I think there’s generally a view that to do that, you need to have people in the office, at least some of the time, and then the labor market softening considerably gives them the ability to put those policies in place,” Ein said. “And enforce them.”