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Office Utilization Rate Could Level Off Soon Thanks to Hybrid Work

Office utilization rates are at the highest level since the pandemic began in March 2020, but the rate could level off soon because of hybrid work, according to a recent report by Moody’s Analytics. Office utilization hit 40.5 percent in April 2022 (relative to pre-pandemic levels) and has been rising steadily over the past two years, with dips linked to three COVID outbreaks.

Companies finally began ramping up return-to-office plans in the first quarter of 2022, and Moody’s expects office utilization rates to climb at least in the short run. The caveat is that remote and hybrid work means there could be a utilization rate ceiling of around 60 percent, though there will be variance by market, industry, and job type.

The report says that tenants experiencing substantially reduced office utilization may reduce their office space, and relative pricing will play a big role in that decision. For example, in New York City, office rent was $72.88 per square foot (per year) as of the first quarter of 2022, but only $27.70 in Phoenix. So, tenants in expensive markets like New York and San Francisco may be more financially motivated to shed space if it’s not actively used. Another possible outcome is re-pricing, according to Moody’s.

Moody’s noted that hybrid arrangements don’t necessarily lead to higher vacancy rates, at least in the short run, which is good news. If all workers are required to show up on the same days, office space needs may not necessarily decline. This provides some hope for office landlords. Remote and hybrid work has been a huge disruptor in the office market, but it’s not necessarily a guarantee it will significantly reduce tenant space needs.

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