Why office buildings are still in trouble

The struggle to fill empty offices is a national phenomenon.

The amount of office space leased in the United States in the three months that ended in September was nearly one-third below the quarterly average for 2018 and 2019, according to Avison Young, a commercial real estate services firm.

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Office vacancy rates across the country stand at a record 19.1 per cent, with Chicago, Houston and San Francisco running above 20 per cent, according to Jones Lang LaSalle, a commercial real estate services company. That includes the record 185 million square feet, or 3.85 per cent of total office space in the country, that is available for sublet. Another 104 million square feet will come onto the market through 2024 as new office buildings are completed, according to Jones Lang LaSalle.

In some ways, New York, the largest office market in the country, with 540 million square feet of space, is particularly vulnerable. Older office buildings in the city are losing their best tenants to new, well-equipped buildings in neighbourhoods like Hudson Yards on Manhattan’s Far West Side, leaving lots of empty office space in midtown and downtown.

“The availability downtown is at a record high of 20.2 per cent,” said Franklin Wallach, an executive managing director at the brokerage firm Colliers. “These are older buildings in the canyons of Wall Street, and we’re seeing large vacancies, not because of one single tenant but tenant migrations that are all hitting at once.”

Office landlords made it through the pandemic in reasonable health because corporate tenants with long leases kept paying rent even if their employees weren’t coming into the office.

But the landlords, who typically flash sunny optimism even in dark days, are now sounding more cautious. They acknowledge that many corporate tenants are sticking with some form of work-from-home policy, and their bullishness is mostly focused on new buildings.

Still, they believe demand will eventually come back. William C. Rudin, the CEO of Rudin Management, a New York developer and landlord, said that companies often give back space in downturns. But when the economy improves, corporate executives change their minds and say, “Oh, my God, we don’t have enough space. We’ve got to take more space.”

The work-from-home revolution is not confined to the coasts. Even in Texas, office attendance has not fully recovered; it is 53 per cent of pre-pandemic levels in Dallas, 57 per cent in Houston and 62 per cent in Austin, according to Kastle Systems, a security card swipe company.

Many landlords say Kastle’s data does not reflect attendance in their buildings. Kastle reports the New York metropolitan area weekly attendance at a little less than 50 per cent of pre-pandemic levels, but Rudin said his towers were on average roughly 65 per cent full over the course of a week. He added that occupancy was much higher at buildings occupied by financial companies, many of which have required employees to come back.

Landlords are also finding that some tenants are making do with much less space.

Companies may struggle to shrink their office space if most employees are expected to come in, say, three days a week. But over time, managers will become more adept at minimising space. And cutting costs could become a priority if the economy slows sharply or slides into a recession.

Van Nieuwerburgh, the Columbia professor, calculates that New York office space on average costs about $16,000 a year per employee. “That’s real money,” he said, “and companies will try to save that.”

This article originally appeared in The New York Times.