America’s historic retreat from the office building may finally be winding down.
More companies are backing away from the looser workplace policies they adopted during the early years of the pandemic as executives increasingly recommit to promoting an office culture.
Amazon called corporate staffers back to the office five days a week last month. The company is now looking for a big block of expansion space in Manhattan, according to brokers.
Dell Technologies said it is requiring its global sales team to work from company offices full time. 3M’s new chief executive last week said the company expected higher attendance from senior employees at the company’s headquarters and other large sites.
One-third of all companies required workers to be in the office five days a week in the third quarter, up from 31% in the second quarter, according to Flex Index, which tracks workplace strategies.
That terminated a streak over the previous five quarters when that rate had steadily fallen. One reason for that decline was because low unemployment gave employees leverage when pressing for more remote work. Now, the white-collar workforce isn’t growing as much, shifting the balance of power back to managers.
No one sees workplaces returning to prepandemic patterns, but most believe the worst is likely over for the office sector.
“We looked like we were on a path that we were going to see a drop continue quarter after quarter,” said Rob Sadow, chief executive of Flex Index. “All of a sudden in the third quarter we saw a shift in direction.”
These signs of stabilization hardly signal an end to office-market turmoil.
The vacancy rate is stabilizing at a near record level of 13.8%, up from 9.4% in the fourth quarter in 2019. Since the second quarter of 2020, U.S. office tenants have vacated close to 209 million square feet of space, the highest amount ever for a four-and-half-year period, according to data firm CoStar Group.
A lot of the current empty office space is now considered obsolete. It may never be filled.
Defaults and other missed payments also continue to rise. In September, the delinquency rate of office loans converted into securities increased to 8.36%, the highest rate since November 2013, according to data firm Trepp.
Banks, which have been reporting third-quarter earnings, say problems with distressed office loans greatly eclipse difficulties with other types of commercial property that are struggling primarily because of high interest rates.
“The real issue is office,” KeyCorp Chief Executive Chris Gorman said in an interview, referring to the commercial-property industry in general.
What’s more, leases for about 40% of the office space tenanted at the beginning of the pandemic haven’t yet matured, according to CoStar. When they do, many of those tenants are expected to shed space.
“The winding down is not over,” said Phil Mobley, CoStar’s national director of office analytics.
Still, after eight consecutive quarters of contraction in office space, the amount of occupied office space essentially stayed flat during the second and third quarters, CoStar said.
In New York, vacancy is falling thanks in part to expanding financial-services firms such as Citadel, Ares Management and Blue Owl Capital. Artificial-intelligence firms, which have been one of the few bright spots in San Francisco’s hard-hit office market, have begun to lease space in other markets, such as Denver, Atlanta and Seattle.
“The trend in the last four years was: I’m doing the bare minimum,” said Elizabeth Hart, Newmark Group’s president of leasing for North America. Now, she says, companies are looking beyond their home base.
“In the last six months, you’re seeing people starting in one geography expanding into others,” she said.
Companies that offer space with gyms, outdoor decks and fine-dining restaurants in their properties say these amenities are luring workers back to their desks.
HSBC Bank, which in 2022 leased about 270,000 square feet for its U.S. headquarters in a new Manhattan development named The Spiral, added an additional 35,000 square feet this year partly because employee attendance soared to 80% from less than 40% at its old space.
“It was clear that we needed more space almost immediately,” a spokeswoman said.
Investors are noticing the shift in market psychology. In October, developer Tishman Speyer completed a $3.5 billion refinancing of a revitalized Rockefeller Center, the largest issuance ever for a single office asset. That paves the way for other owners of other well-leased office properties to follow, analysts said.
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“Demand in the market [from bond buyers] was not only rising but unsatisfied,” said Rob Speyer, chief executive of the firm. That interest persuaded him to refinance in August, even though the debt on the building wasn’t maturing until the middle of next year.
While the volume of office-building sales remains tepid, investor interest in distressed office properties has been rising after prices have tumbled. Real-estate firm Eastdil Secured this year has completed 18 office sales valued at $2.6 billion led by lenders disposing of assets, according to people familiar with the matter. That compares with three of these kinds of sales at this time last year, the people said.
“Things are looking better from a valuation perspective of the office sector than they ever have,” said Dylan Burzinski at real-estate analytics firm Green Street.
Source: The Wall Street Journal October 29, 2024 | By Peter Grant