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Decoding the Data Reveals Surprising Office Market Trends

A casual observer of the office market may see the current situation as grim, if not downright apocalyptic. Headlines over the past two-plus years have focused on the popularity of remote work, the battle between workers and employers in return to the office, and occupiers downsizing footprints. But there is plenty of bright side to see too. Occupancy levels have surged after Labor Day to post-pandemic highs, and there is scattered good news companies expanding their office footprints. 

Much of the talk about the future of work and the office has been speculation, but it’s clear the office market is in upheaval, and a transformation is underway. But that doesn’t necessarily mean that the market will fall apart entirely, according to Kevin Fagan, Head of CRE Economic Analysis at Moody’s Analytics. Fagan told me recently that to get an accurate picture of the state of the office market, you need to stop chasing the often-contradictory headlines and dig deeper into the data. “It’s important to realize that the more pessimistic views of the office aren’t reflected in the data yet,” Fagan said. “This fall is when we’ll start to see more data that will indicate what’s really happening with the office market.”

Fagan authored a report for Moody’s in June that thoroughly analyzed data available about the office market to back up his assertions that, compared to previous economic cycles, the current downturn in the office sector is historically benign. Fagan says bearish views on the office have mainly relied on cherry-picked anecdotes, informal surveys, and widely divergent views of how much less office space occupiers may lease per worker.

Meanwhile, the real revenue impact of the brief COVID-induced recession has been the least damaging of all the office market’s busts over the past five decades. “While net office demand may or may not slip as firms gradually rationalize their office space needs for post-COVID workforces, there are simply no clear signals that we’re in the throes of an office apocalypse…yet,” he writes.

Fagan explained that office market performance is ‘procyclical,’ meaning it usually moves roughly in sync with business cycles. But he notes that the 2020 downturn was an anomaly, and a crash in office rents and values never materialized. The COVID-19 recession has been notably innocuous compared to other downturns in U.S. history. The last sustained decline in office effective rent and occupancy rates in 2008 was 12.3 percent and 5.2 percent, respectively, which was much more severe than the result of the 2020 downturn. By comparison, Moody’s report shows that the total decline in effective rent and occupancy rate since the pandemic started has been 1.6 percent and 2.1 percent.

Historical and Forecasted Effective Rent and Occupancy for US Offices

Source: Moody’s Analytics CRE | Compared to Past Cycles, How Bad Has the Pandemic Been for Offices? (

It’s important to note that some U.S. office markets have been hit particularly hard compared to others. Sunbelt markets, like Tucson, Arizona, and Palm Beach, Florida, saw year-over-year rent growth in 2021 of more than 4 percent. But markets like New York City and San Francisco saw the worst rent declines, down 4 percent and 3.5 percent, respectively. This should be no surprise to real estate professionals, as much has been written about the struggles of NYC and San Francisco. Moody’s report said these two office markets have been most at risk because of highly dense populations, high costs of living, and having the highest share of jobs that can be done remotely.

Nevertheless, the report notes that the New York and San Francisco office markets have seen much worse in the past. From a debt perspective, there has (so far) been no significant spike in CMBS office loan delinquencies in the hardest-hit office markets like NYC and San Francisco. Delinquency rates in these two cities are lower than they’ve been since before the 2008 financial crisis happened.

Historical Delinquency Rate for CMBS Loans Backed by Office Property

The bottom line in Moody’s report is that there are not yet any clear signs of a broad exodus of occupiers from the office market or imminently crashing property values. Some individual data points here and there build a case for an office crash, but when you dig deeper into the data, the report notes no significant trends clearly indicating a sustained and dramatic decline in office values, occupancy, or revenue.

The report states several times that the current data doesn’t mean an office crash can’t or won’t happen. As Fagan told me, failure tends to happen gradually at first and then all at once, and he’s keeping a close eye on data points and indicators that could flash red before they show up in property values and revenue. One of the biggest indicators Fagan is watching is expiring leases. Unlike public commentary, lease expirations show the real choices office occupiers are making. Fagan is also tracking subleasing, lease terms, if office floorplans are being re-drawn, and if partial remote work correlates with office vacancies. “You can’t chase the headlines,” Fagan said. “One anecdote of a company reducing space is not indicative of a trend on the office market.”

Moody’s concludes the report by saying that between 2023 and 2025, we’ll start seeing some definitive trends about the future of the office. More office leases will expire, and more decisions on evolving office space needs will be made by corporate occupiers. For the typical occupier, the cost of their employees is more important than their real estate costs. Companies must first settle on their post-pandemic work style before they overhaul their real estate needs.

Companies figuring out changing work habits are experimenting with them, and this will take a substantial amount of time. If the disruption of remote and hybrid work really does damage office values, it will manifest itself in the data Moody’s and others are tracking in the next few years, but it hasn’t yet. 

What could complicate this natural progression, though, is if a recession takes hold sometime soon, as many economists predict it will. “The difference now is that companies know they can shift to remote work,” Fagan said. “Companies don’t want to lay people off, so if they have to make cuts, real estate may be a more attractive option to cut in a financially stressed situation.”

The biggest piece of advice Fagan has for office owners is to look very closely at the business plans of their tenants. Certain industries are more susceptible to remote and hybrid work, and depending on the tenant’s financial health, they may have less of a need for office space. “You need to do a more granular analysis of the rent roll than ever before,” Fagan said. “There’s a need for a much more intense understanding of office tenants.”

The sky isn’t falling … yet

Another recent report that shows a more nuanced view of the office market was CBRE’s survey of tenants on occupancy, return to work, and long-term portfolio planning. The survey of 176 corporate occupiers by CBRE and CoreNet Global revealed that companies remain cautious and leasing activity is still below pre-pandemic levels, but more occupiers seem ready to make long-term commitments about office footprints. 

Thirty-one percent of occupiers said they plan to add office space over the next three years, 19 percent say it will stay the same, and 46 percent expect it to get smaller. Those numbers don’t seem to bode well for office owners, but there’s a caveat. Only 20 percent of occupiers said they expected their footprints to expand in a previous CBRE survey in January 2021. “Clearly, not all occupier decisions are being driven by cost reduction or a desire to shrink their overall footprint,” the report said.

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Office occupancy has seen a post-Labor Day bump, but it’s still low compared to pre-pandemic levels. Occupancy in 10 major cities was 47.4 percent of pre-pandemic levels for the week of September 8-14, according to Kastle Systems, which marks a new high since the pandemic started. Some metro areas saw particularly large spikes in occupancy rates. New York City offices have struggled for a while, but occupancy numbers jumped from 38.6 percent on September 7th to 46.6 percent on September 14th.

An increase in office occupancy is great news, especially as the weakening economy, inflation, and talk of a looming recession have caused some large, multinational companies to reduce office footprints. But while some firms are slashing space, not every corporate occupier is downsizing their real estate, according to Julie Whelan, Global Head of Occupier Research at CBRE. “Life sciences firms are still doing well and may expand, and some smaller companies are expanding office space, too,” Whelan said. “There are numerous scenarios where corporate occupiers are expanding footprints.”

Whelan noted that many office tenants are cautious about their real estate space decisions, and moves to reduce space can be reversed. But because of the high demand for quality office space, she said tenants may need to be careful with how much space they shed. Class A offices and the top-tier of the market are doing very well, so if a tenant give up a high-quality space, they may be unable to get it back so easily. The high demand for Class A properties also means landlords need to know their tenants well. “If you’re in a good location, office owners must ensure the building is competitive with the right technology, amenities, and sustainability so tenants can meet their ESG goals.”

One of the interesting findings in CBRE’s survey for Whelan was the vast disconnect between what companies and employees want regarding remote work and returning to the office. Many companies clearly want a more robust return to the office and are pushing for it, but the survey showed employees have other ideas. Fifty-eight percent of executives say workers are visiting the office less than desired, while just 25 percent of employees agree with that statement. Whelan believes companies aren’t using the right tactics to get employees back in the office more.

Executive Sentiment vs. Their Perception of Employee Behavior Regarding Return to Office

“Trying to close the gap through communication and encouraging a return to work is what occupiers are doing, but that’s not enough,” Whelan said. “Companies need to talk about why employees need to be back in the office and get to the real value proposition.” Whelan added that training managers to establish new norms and behaviors about returning to work is also critical because it sets routines for office visits, team meetings, and collaboration. Executives often set the mandates for return to office policies, but it’s at the manager level that these policies are carried out.

Many have said a recession may cause higher office occupancy rates because workers may feel compelled to return, but Whelan doesn’t buy that. “If you’re trying to build long-term loyalty in a company, creating an impetus to get back to the office from fear isn’t the right way to go,” she said. “Valuable, talented employees will remain competitive in the job market, even during a recession.”

All these minutiae about a company’s return to office policies may seem beside the point for office owners and landlords, but it’s more important to know these things than some may think. As Fagan of Moody’s said, office owners need to learn more about their tenants, including their business plans, how they plan to use the office, and the policies they use to get employees back to their desks. A potential tenant with a vague and weak return-to-office policy may not be as valuable as one that has a better plan.

Many have prophesied the death of the office and an imminent crash, but the critical data about the office market simply don’t show that happening. For now, the good news for office owners is that compared to previous historical cycles, office values and revenues have not cratered. Headlines everywhere may be shouting about the end of the office as we know it, but the actual state of the market lies beyond that in the hard numbers. It’s going to take some time to understand what’s really going on, and most of the talk now is just noise.

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