After office occupancy rose by 6 million square feet during 2021 Q3, occupancy fell anew by 2 million square feet as of November compared to 2021 Q3, bringing the total loss in office occupancy to 133 million square feet since 2020 Q2. Office occupancy has not significantly recovered even as office-using jobs are now back to the pre-pandemic level. The factors of the ongoing pandemic, more people working from home (fully remote or hybrid) compared to the pre-pandemic level, the decline in office space per worker, and the tight job market all pose headwinds to absorbing this enormous amount of office space.
As of November 2021, the metro areas that have suffered the largest loss in office occupancy are New York (-31 million sf or MSF), Los Angeles (-11.5 MSF), San Francisco (-11 MSF), Washington, DC (-9.8 MSF), and Chicago (-9.5 MSF), are they are headquarters of major tech, financial, and business corporations.
Secondary or tertiary metro areas have been less impacted. Leading the metros that have seen an increase in office space occupancy are Durham (+1.4 MSF), Boise (+1.4 MSF), San Antonio (+1.4 MSF), and Palm Beach (-1.3 MSF).
Working from home is on the decline but office workers teleworking use nearly 4x less pre-pandemic levels of office space
The disconnection between job growth and the increase in office occupancy that should have normally accompanied job growth can arguably be attributed to two factors: 1) working from home; and 2) the decline in office space per person.
Prior to the pandemic, there were 30.168 million workers in office-using industries. Jobs plummeted to 28.2 million in the second quarter of 2020, but those job losses have almost been nearly recovered, with the number of employed workers at 30.136 million as of October 2021. However, despite the almost full recovery of job gains, office occupancy has not recovered, with 133 million square feet released to the market.
This disconnection can arguably be related to the increase in number of people working from home compared to the pre-pandemic level even as 30 million workers have gone back to work. In 2019, 8.9 million people worked from home, according to the US Census Bureau's American Community Survey, accounting for 6% of the workforce. Of those, I estimated that 4.4 million workers were in office-using industries, accounting for 9% of the workers in office-using jobs.
During the economic lockdown, 48.7 million people worked from home, or 35% of the workforce. Of this, 41.5 million were in office-using jobs.
As of October, only 18 million are working from home, or 12% of the workforce. Among office-using workers, 15.8 million work from home or 20% of the workers in office-using industries. The number of office-using workers who work from home is still 3.6 times the number of workers who worked from home prior to the pandemic. Notable companies such as Google, Amazon, Facebook, Apple, Uber, Starbucks, Intel, and Capital One have planned a return to the office in 2021, but those plans have been postponed to 2022 with the flare-up of COVID cases during July–September.
Office use per person will likely continue to decline due to the use of flexible space and hot-desking
The average square foot per office-using worker has been declining since 2011 from 273 sf to 243 sf prior to the pandemic. The office use per person temporarily increased to 260 sf in 2020 Q2, but has gradually declined to 239 sf as of October 2021.
The decline in office footprint per person prior to the pandemic is related to hot-desking and co-working, where office spaces can be as small as 60 sf per person. With the pandemic, the square footage has increased to allow for physical distancing (e.g., as advertised by WeWork). However, in general, hot-desking and hoteling office footprints are smaller than a regular office so the increasing use of flexible space as part of an efficient work space strategy to support a co-working work schedule strategy could continue to drive down the office space per person past the pandemic period.
Lack of workers could slow the job recovery and absorption of office space
More office space is likely to be absorbed in 2022 if plans to return to the office are not upended by another major resurgence of the Delta variant/COVID cases. At an average of 240 sf of office space per worker, the 133 million square feet of office space that became unoccupied can be absorbed in 7 months given the current pace of job creation in office-using jobs of 80,000 monthly in 2021.
However, while there is a strong demand for office-using jobs, only half of the job postings can be filled. As of 2021 Q3, there were on average 2.5 million job openings at the end of the month in office-using industries, but there were only, on average, 1.25 million unemployed workers during the months of 2021 Q3. Due to some labor market friction (workers can't move geographically to where the jobs are for reasons such as the high cost of housing or due to personal reasons), not all those openings can be filled. Slower job growth means slower demand absorption of office space.
Office rents still have to come down in some areas to create incentive for conversion of office space into housing units
NAR's latest study ―Analysis and Case Studies on Office-to-Housing Conversions― found that current economic conditions can lead to the conversion of office space into 45,000 housing units, which can absorb 45 million square feet of office space assuming an average size of 1,000 square feet.
Metro areas like New York, Chicago, Los Angeles have lower Class B/C office rents compared to Class A apartment rents that make conversions feasible.
However, office rents in the metro areas of San Francisco, Washington DC, Houston, Dallas, and San Jose are still higher by about 10% to 40% compared to the average apartment rent, so office rents will have to come down to increase the economic feasibility to converting office space into housing.
In summary, the demand for office space will likely continue to grow, but several headwinds pose challenges to a fast office market recovery, with vacancy rates still likely hovering at over 10% until the end of 2022.