office space demand

Understanding the New Normal for Office Demand: How to Invest Accordingly

During the coronavirus pandemic, office utilization rates fell through the floor as the result of social distancing guidelines and stay-at-home orders mandated across several states. As the pandemic ends, office space utilization is on the rise – but experts at Fitch Ratings believe that the new normal utilization will remain lower than in previous years. Here’s what investors should know. 

Work-From-Home Flexibility is Here to Stay

The key driver for the lower office utilization rate is the work-from-home flexibility. During the pandemic, countless employers scrambled to find ways to keep their operations afloat despite social distancing requirements, and as a result, they sent their employees home with everything they needed to be productive remotely. While many companies expected this move to be temporary, many found that giving their workforce access to a remote or hybrid working environment improved their productivity. As such, hybrid and remote roles grew even as in-office role availability fell. Today, office demand continues to grow, but it is climbing toward a newer, much lower normal level 

By the Numbers

According to the Partnership for New York, 38% of office workers were in their physical workplaces in April 2022. Now, as of October 2022, that number has risen to 49%. This represents a sharp increase, but it is still much lower than the number of office workers present in their employers’ physical office spaces before the pandemic. While companies aren’t terminating their leases or selling their office spaces just yet, it is safe to say that office demand will be much lower in future years, and investors should plan accordingly. 

What to Expect

If you own office space that you have leased to a company, there are a few things to consider: 

  • Office space leases are long-term – often about five years – and few companies break those leases. Use the time remaining in your tenants’ leases to research up-and-coming companies in the local area who might be interested in utilizing your space if your current tenants move at the end of their leases. 
  • Despite decreased demand, commercial rents continue to climb in response to rising federal interest rates. Be careful that your rents are in line with the current local market, especially if you plan to increase them at the end of your tenants’ current terms. 
  • Lowered demand for office space has also lowered the value and cost for these buildings, so if you’ve considered investing, the decision to buy may be difficult. You can obtain property cheaply right now, but be prepared for it to sit empty for a few months or even up to a year. Commercial space demand will increase in the future, but it is difficult to predict when. 

With more people working in remote or hybrid positions in today’s post-pandemic world, it comes as no real surprise that the demand for office space has fallen. While occupancy is on the rise, experts believe that investors and property owners should prepare themselves for a new normal low.