Commercial Real Estate News / Insight / What's the Current State of Office Space?

What's the Current State of Office Space?

Published: 09-25-24 Category: Insight

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The inside of an office building during the day.

As we near the final quarter of 2024, the office sector of commercial real estate (CRE) continues to struggle.

While some investors are planning to remodel for mixed-use or convert to apartment or loft rentals, the future of the commercial office space sector remains unpredictable.

This is due to various factors that affect some metro areas more than others, adding to the difficulties faced by CRE analysts.

For example, metro areas that were facing office shortages before the March 2020 arrival of a global pandemic may not be seeing the high vacancy rates as areas with adequate office inventory or were verging on being overbuilt.

In addition, the recovery of commercial office space was uneven across different regions and cities. Some major metro areas that were hit hardest during the pandemic have shown significant resilience, while others are still plagued with high vacancy rates.

Office buildings that have seen a more favorable recovery post-COVID have often housed businesses where remote work reduced efficiency. Other businesses required in-house staff to perform certain duties, from personalized customer service to industrial repairs.

A third factor is the continued popularity of the remote office. While working at home became mandatory for many businesses for various reasons, millions of staff realized that remote work was often less stressful and had major economic advantages.

When tracing foot traffic by cell phone use, nationwide employee office visits during the first half of 2024 were around 28% lower than in July 2019 and 16.5% higher than in July 2023.

While some businesses saw the money-saving advantages of eliminating office rentals, others needed help convincing staff to return. Some employers decided to upgrade their offices as incentives to return to work, which was a positive move for some Class A offices.

Since an office building's location makes a big difference in its post-COVID recovery, we'll look at several major metro areas to see how each is faring.

Are Big Cities Recovering?

The recovery of commercial office spaces has been uneven across different regions and cities.

Major metropolitan areas that were hit hardest during the pandemic are seeing a flight to suburban locations and more 100% remote and hybrid offices.

#1 – New York City

A review of Manhattan's vacancy rates shows that these numbers rose to over 15% during the first half of 2024.

This has caused asking rent prices to fall by 8% since 2020, which is actually a mild drop when compared to the 33% drop seen during the 2008 to 2009 recession.

While exact data isn't available, CRE brokers report a continued migration of businesses and staff from the crowded boroughs of NYC to nearby suburbs. This is another long-term effect of the COVID-19 pandemic.

#2 – San Francisco

The Bay Area's office market is suffering more than any other major city, with commercial vacancy rates hovering at 30% and no fast fixes in sight.

One major reason for soaring office vacancies is the exodus of companies from the city. Since 2020, a growing list of businesses has packed up and left. These include Meta, X/Twitter, PayPal, Salesforce, Chime, Airbnb, and Slack.

Considering that the value of office real estate hinges on rental income, asset values have been affected, and investors are worried…especially as it's predicted that over $700 billion in commercial loans for San Francisco properties will mature in 2024.

#3 – Miami-Dade

While other metro areas struggle, the Miami metro area earned bragging rights to the fourth-lowest vacancy rate among the nation's big cities. In addition to the increasing population, the city's strategic location continues to lure more business.

Even the metro's International Airport is busier than ever, with 15,000 more commercial flights routed through Miami in 2023 than in 2018.

Major move-ins are scheduled for 2025, including Mediterranean Shipping, which will move to a 130,000-square-foot downtown space in 2025.

#4 – Dallas-Fort Worth

As of early 2024, the Dallas-Fort Worth office market's vacancy rate has edged up to 20.6%, marking a 20-year high. Nevertheless, DFW continues to draw new businesses, offering financially attractive options to newcomers.

2024 leasing activity has been driven by smaller leases, with average deal sizes reducing by around 19% compared to 2019 leases.

Owners of aging buildings are feeling the most pain, as over 80% of the vacant space is found within buildings built during the 1980s to 2000s. The oldest, vintage-1980s buildings are particularly suffering, with vacancy rates well over 40%.

Details of these cities' office vacancy rates are a sample of similar challenges nationwide. Investors have largely recognized that the global pandemic permanently changed the office lifestyle.

Office Remodeling and Adaptation

Here are some approaches that office real estate owners have adopted in response to new demands and expectations.

Hybrid Work Support: Office spaces are being redesigned to create more collaborative spaces, install state-of-the-art video conferencing facilities, and provide hot-desking options for employees who split their time between home and office.
Technology Integration: Building owners are investing heavily in smart building technologies. These include high-speed internet, touchless entry points, and sensors for space utilization tracking and energy efficiency. These help support the growing demand for digital collaboration, remote work, and the Internet of Things (IoT).
Wellness-Focused Amenities: Rooftop gardens, fitness centers, meditation rooms, and spaces for socializing have become common features in remodeled office buildings. These amenities have helped companies entice more workers from remote work.
Lease Flexibility: Tenants are demanding more flexible lease terms. Short-term leases and options for expansion or contraction are becoming common, putting pressure on building owners to adapt their business models.
Conversion: Some investors have taken a more drastic step, converting older office buildings into residential or mixed-use properties. While many office buildings aren't suitable for conversion, older ones actually have an advantage because of their smaller core-to-shell distance.

Since residential building codes generally require that natural light reach most rooms, the smaller core-to-shell distance may translate into a faster, more affordable conversion.