The Future of Office Spaces: A Slow Recovery for Landlords

The U.S. Labor Day holiday is set to be a significant milestone in the ongoing efforts to bring workers back to the office. However, according to Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics, it won’t be a quick fix for landlords.

While many companies are urging employees to increase their office attendance after Labor Day, LaSalvia believes that a complete return to the office will depend on the incentive of job opportunities or promotions. This sentiment has been emphasized by Amazon.com Inc.’s Chief Executive Andy Jassy, who has warned employees that they must return at least three days a week or face consequences.

However, this push may face challenges. The upcoming U.S. jobs report for August is expected to show unemployment at a historically low rate of 3.5%. Despite slowing hiring, the labor market seems largely unaffected by the Federal Reserve’s high benchmark rate, which is currently at a 22-year high.

On the other hand, landlords are experiencing a different reality. With a national vacancy rate of approximately 19% and mounting debts, owners of older Class B and C office buildings, as well as properties in struggling business centers, are particularly vulnerable.

This issue can be attributed to oversupply, much like the struggles faced by shopping malls. Many office properties are at risk of becoming obsolete as tenants gravitate towards better buildings and more desirable locations. Leasing data since 2021 reveals that Class A properties in central business districts have a distinct advantage over less desirable buildings in city centers.

According to LaSalvia, while the office space may not be dead, there is potential for its revival in neighborhoods with a new purpose. These areas cater to the needs of hybrid work and foster communities that bring people together.

The Changing Landscape of Office Space

The impact of the pandemic continues to reverberate through the office real estate market, with shifting trends and new dynamics emerging. One way to gauge these changes is by examining rents in different submarkets.