Rising Office Vacancy Rates: The End of In-Person Jobs?

In 2020, the COVID-19 pandemic and its wide-reaching impact left nearly everyone questioning what the future held. Would hospitals be able to manage the ever-increasing influx of COVID-related cases? How could companies avoid filing Chapter 11 with stay-at-home orders in place? More importantly, when would a vaccine be engineered to combat this deadly virus? As time passed, most of these queries would be answered, and life—for the most part—would “go back to normal.”

However, four years later, some of COVID-19’s consequences linger: a cohort of companies have adopted the work-from-home” (WFH) model permanently—leading to 12.7% of full-time employees working from home, while 28.2% work a hybrid model as of 2023, Forbes reports. Subsequently, office leasing has and continues to rapidly decline. According to numbers from Moody Analytics, “a staggering 19.6% of office space in major US cities wasn’t leased as of Q4, up from 18.8% a year earlier.” That is “slightly above the previous records of 19.3% set in 1986 and 1991, and the highest number since at least 1979,” based on Moody’s historical data.   

As major cities across the country report similar losses, an old line of questioning is re-emerging. Will remote and hybrid work models overtake in-person jobs? Is a “return to the office” mandate still plausible in 2024 and beyond? Can commercial real estate markets endure this shift? Could commuting to the office soon be a routine of the past? Below, we answer these pressing questions and more using insights sourced within the AlphaSense platform.

Fall of Major Office Markets

History continues to be made: the national office vacancy rate surged to an unprecedented 19.6% in the last quarter of 2023, marking the most substantial quarterly escalation since the beginning of 2021 and exceeding the 19.3% threshold observed twice over four decades according to Moody’s data. It’s a dramatic departure from where the rate stood before the  pandemic at approximately 16.8%. 

Cities host to the largest commercial estate market are feeling the strains of this trend. 

Considered to be the US’s largest office space market and encompassing 263.05 million square feet of space,Midtown Manhattan’s vacancy rate rose to 22.3% from its 2022 level of 21%. Meanwhile, average rent climbed to $78.23 per square foot from $76.51 million in the same period. Class A buildings in the area commanded an average rent of $85.44 per square foot. Likewise, Los Angeles experienced an increase from 22.9% to 26.2%, while San Francisco, currently holding the nation’s highest vacancy rate at 32.5%, saw an increase from 24.1% in 2022.

In fact, San Francisco experienced the highest amount of negative absorption (i.e., previously occupied space that became vacant) among all markets tracked by Cushman & Wakefield, totaling 2.71 million square feet, in Q4 2023. Throughout the year, the San Francisco market saw a total of 6.95 million square feet of negative absorption, which represents a remarkable 8.1% of the market’s total 85.97 million square feet of space. 

“[In regards to office space], everybody is wringing their hands over because of after-COVID. It’s interesting because it’s not like a normal economic market [dip] with what’s happening in office and the high levels of vacancy. It’s more of a societal shift that we haven’t seen before in terms of people working from home and hybrid workspaces. I don’t think it’s going anywhere,” an expert shares in an AlphaSense transcript.

“Your traditional high-rise space, cities like New York and San Francisco, they’re going to have long-term impacts on a lot of vacancies. What happens there is we can only begin to speculate, because you’ve got these really large properties. What you’re saying now is called zombie office space. You basically have people who are still paying the leases because the deals aren’t up, but there’s no one actually in there. They’re not going to be renewed either, so that’s tricky to say.”

But while it seems that a majority of commercial property is doomed to become or stay vacant, certain spaces remain viable for the market. More specifically, luxury buildings categorized as Class A seem to be drawing demand. These typically offer 24/7 security and on-site property management, are built with state-of-the-art mechanical systems and infrastructure, and are located on a major avenue near transportation hubs.

Class A buildings offer “flexible or smaller configurations,” which are especially attractive to companies who choose to maintain a physical office footprint for branding, gathering, training, and collaboration purposes, Moody’s report shares. 

Rise of the Remote Worker

Will “commuting to work” soon be a routine of the past for the average American? Based on recent numbers from Upwork, maybe. An estimated 32.6 million people or roughly 22% of the workforce will be working remotely by 2025. It’s a projection that’s reinforced by an already sizable WFH population where, as McKinsey reports, 58% of Americans (92 million) can occasionally perform their jobs at home. But what’s the breakdown of that percentage? 

Thirty-five percent of respondents said they can work from home full-time, while another 23% can work from home one to four days a week. Only a mere 13% of employed respondents said they could work remotely at least some of the time but opt not to. These numbers reinforce the consensus that flexible work is not only popular, but many want to work remotely for much of the week when given the choice.

In fact, WFH and hybrid employees prefer their current arrangement so much that 57% would consider leaving their current job if their employer stopped allowing remote work according to FlexJobs. While the current US job economy is certainly in favor of the employer, attracting and retaining the most desirable talent will require listening to and potentially embracing the wants of the average American worker. Already, 16% of companies are fully remote, as in operating without a physical office according to Apollo Technical. 

And WFH can be beneficial for corporations, as 35% of remote employees feel more productive when working fully remotely, according to a Gallup survey. This could be due to reduced commute times, fewer in-person distractions or the ability to design a work environment that suits their needs.

It’s no question that the COVID-19 pandemic was the catalyst for bringing remote and hybrid work models into popularity. However, other major US events certainly initiated the concept, according to an AlphaSense expert transcript, allowing leadership to reap operational benefits: 

“Prior to the 2008 recession, we had been doing a lot of work on workplace strategy and work from home. We had worked with companies that were allowing you to put in policies to allow 15%, 20%, 25% of their employees to work from home. The technology was there to do that. It saved an incredible amount of money in their real estate spend. We were able to densify the office. We were able to keep productivity up.”

“When the 2008 recession hit, all of a sudden, no one wanted to work from home, everyone wanted to go into the office because they were afraid of being laid off if they weren’t seen at the office. Now this one’s interesting because the unemployment rate is still low, but because of that people are demanding in a lot of cases to work from home, even though the employers are saying in a lot of cases, “return to office,” because people think they can get another job.”

Commentary from C-Suite

Discover the conversations leadership across industries are having about WFH, return to work, office leasing, and more within the AlphaSense platform.  

“The office sector in particular, I think is a bit structural for a while as a result of the change in working dynamics, work from the office or work from home, changed during COVID. We are seeing a gradual return to office across the industry, but I don’t think we ever get back to forced 5 days a week in the office across all sectors that would populate office space… But over time, the economy is growing and demand for office space will rise. And so you need to have that transfer from current holders who may need less space to new holders that are growing. So if you take an intermediate to long-term view on office, we think there will be opportunities to actually do quite well in office, but not yet.”

– Sun Life Financial Inc. | Q4 2023 Earnings Call

“Everybody’s very comfortable coming to New York City to entertain themselves, but they’re still playing this game that they’re not necessarily comfortable going back to the office. As far as what our clients are looking at and what I see over the last three months, really getting back to the office, there’s a greater demand than what we’re actually seeing right now, from the employers wanting their people back. They need it for collaborating. They need it for culture. You can’t create company culture over Zoom, with now some of those faces recognize this.”

“We do finally have more CEOs in larger name-brand companies starting to let the public know that they’re mandating not just the three-day workweek, but more of a four-day workweek. It hasn’t necessarily 100% translated over yet to butts in seats. I say this because it’s sometimes a little more difficult for companies to actually drop the hammer. A lot of contracts that were written over the last three years for their employees literally had in those contracts their ability to work from home.”

– Competitor | Expert Call

“But there’s been a funny phenomenon also within the work from home and return to office is that you hear a lot of companies talking about going back, but they haven’t really. So we’re not sure that the full recovery story is over. So we do have people who have headlines say, let’s go back and maybe it’s gone up to 2 days. But that could continue, and you could see more mandates as opposed to strong suggestions or mandates that are being ignored by some companies. And you see it very much differently in different sectors, financial, hospitality, you name it.”

– Aramark | Conference Transcript

“Given their size and location, the suburban office buildings we finance are generally leased to local and regional businesses that, on average, have been less supportive of remote work and hybrid work arrangements that larger companies meeting the buildings we finance have tended to be better utilized than larger buildings.”

– Atlantic Union Bankshares | Q1 2024 Earnings Call

“On the side of positive trends, the corporate pressure on employees to return to the office continues to gather momentum. Major companies, including employers such as Google, Meta, Salesforce and Amazon, to name a few, have all shifted their policies towards more consistent in-office collaboration, having employees attending the office a minimum of 3 days a week, which appears to be a common current policy should bolster overall space needs and benefit high-quality office assets. We believe these trends will further strengthen throughout 2024.”

– City Office REIT, Inc. | Q4 2023 Earnings Call

Stay On Top of the Conversation

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