Embracing the New Normal in the U.S. Office Sector

The office sector is going through a period of change intensified by COVID-19 lockdowns.

Structural changes are underway in the U.S. office sector. As the world moves on from COVID-19, much of life has returned to pre-pandemic norms. Yet work-from-home continues to reduce office occupancy, while demand shifts to more-flexible and higher-quality space.

Office occupancy reached a cyclical low of 81.4% in December 2023, a level not seen since the early 1990s (see Exhibit).[1] Still, green shoots leave some room for optimism, at least for the longer-term. First, employers continue to modify workplace policies almost exclusively in favor of greater office attendance, as remote-first companies have become a rarity.  For more than three months, remote hiring has stabilized at roughly 9% of all postings according to LinkedIn Economic Graph, and 90% of the Fortune 100 currently work at hybrid or fully in-office companies, with an average requirement across the entire index of 3.1 days of required attendance per week.[2] Second, construction is grinding to a halt: Less than 300,000 square feet of space was started in the first quarter of 2024, by far the lowest total in nearly 40 years of recorded data. We project further near-term deceleration in new supply due to tight financing and high vacancy rates. Meanwhile, undesirable office buildings may be removed from the market, reducing vacancies further.


Exhibit: U.S. Office Occupancy and Completions as % of Stock (1990-2023)

Embracing the New Normal chart.png

Source: CBRE-EA. As of December 2023.


Within the overall office market, important nuances have emerged. New and differentiated office properties continue to outperform in occupancy and rents.[2] Office space is also being used differently as the COVID-19 pandemic brought emphasis on more flexibility. Flexible workspace—which offers shorter lease lengths and can include serviced offices, managed offices, shared offices and coworking spaces—is taking an increasing share of the office market.[3] In the past year, the amount of flex space tracked by CommercialEdge has grown to 124.8 million square feet from 113.5 million.[4]

The office sector is going through a period of change intensified by COVID-19 lockdowns. Yet workers are returning to the office, at least for part of the week and supply is evaporating. The road to recovery may be long, but in our view, better-quality buildings, offering amenities, transportation options, and leasing flexibility, appear well positioned to lead the way.

 

Additional Resources

U.S. Real Estate Debt Market Perspectives

In our view, high yields, attractive spreads, impending debt maturities, and a retrenchment from banks have created favorable conditions for private real estate debt investors.

U.S. Real Estate: Risk or Opportunity?

Doomsday headlines may persist, but do not be fooled: The outlook for real estate is getting brighter.

Retail sector shines as the U.S. consumer remains resilient

We believe that structurally tight labor markets and robust household finances — together with low current vacancies and limited new construction — will continue to underpin healthy retail fundamentals for the foreseeable future.

1. CBRE-EA. As of March 2024.

2. JLL. As of March 2024.

3. JPM Research. As of March 2024.

4. Commercial Edge. As of March 2024.

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