The return to office appears to be stalling. Office occupancy has hovered around 50% all this year, according to data from Kastle Systems, a company that tracks office badge swipes. And companies now have a better picture of exactly how much of their office space is actually getting used.
Accordingly, about 75% of businesses plan to reduce office square footage next year, according to a survey from hybrid work platform Robin, including responses from over 500 business owners and facilities managers. That’s up 30% from last year. It comes amid financial challenges pushing them to cut back on costs, but also as they consider exactly what kind of spaces staff need while working in-person on a handful of days a week.
The Robin survey also found about 40% of survey respondents said they are currently using only half of their available office space – and only 28% said they are using all of their office.
“Hybrid work is truly changing the patterns of when we use space,” said Robin CEO Micah Remley. “The question about leases getting let go of, that will absolutely rise,” he said.
So what are they?
Shadow vacancies are essentially when a space looks occupied on paper, even if it’s not actually getting utilized by the tenant. The concern is that a swath of corporate tenants may not renew their leases in the future, sending vacancy rates up and further taking activity away from previously vibrant city centers. And while it’s not a new concept, it is getting more attention today as the full impacts of the pandemic become more clear.
Right now office vacancy in the U.S. is around 18% while about 80% of office space is currently occupied, said Julie Whelan, global head of occupier research at real estate firm CBRE. Office vacancy is expected to peak at the end of next year just below 20%.
Then how big of a concern is this?
“But we don’t think we’ll be in a market that’s ever 40% vacant,” she said. “You cannot deny that downsizing is happening, because it is, but we do not think it’s going to be the death of the office market,” said Whelan.
It’s important to keep in mind that “corporate-leased spaces are never looking to get a perfect utilization ratio,” Whelan added. “There is always going to be an element of their space that goes underutilized at any given time. You just cannot create a perfectly functioning space that is always full during the hours of work. So there’s an element of just shadow vacancy that’s accepted within the market.”
Companies currently or planning to downsize are decreasing their square footage by about 20% to 30%, she said. And they are largely moving to smaller spaces in higher quality buildings, loosely defined as those built from 2010 onward. “There’s absolutely a trend towards what we would call flight to quality,” Whelan said.
And a decades-long post recession trend towards efficiency in office spaces now accelerated with hybrid work also means companies are allocating far less square footage per person than in the past.
“So that means that we are operating in a much tighter employee to office space ratio nationally than has ever been in existence, which is a healthy thing for the office market,” she said. As jobs continue to grow in the long-term, “that will ultimately maybe not lead to new leased space, but it will lead to organizations eating into their shadow vacancy.”
Does anyone want to sublease my office?
Those stuck in long-term leases however are now turning to subleasing their unutilized office space — or at least trying to. Since the pandemic began, the amount of office space being subleased has nearly doubled and remains at near record levels, according to CBRE.
The amount of space up for sublease varies by industry, with tech companies accounting for 23% of that space, followed by finance and insurance firms, then business and professional firms, each holding 15% of that space, according to an April report from CBRE.
But they seem to be struggling to find subletters. With more space on the market, actual subleasing activity hasn’t kept up, and data suggests subletters are getting 20% to 40% discounts on subleased space compared to direct space, though that varies widely by market, the report found.
“You don’t have a lot of that space that’s actually getting subleased,” Whelan said.