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Demand for office space has slumped further, with vacancies reaching at least 20-year highs in the US and London, as people continue to work from home despite companies’ attempts to get staff back in the office after the height of the Covid-19 pandemic.
Vacancy rates have risen to fresh highs and investment in offices fell sharply in the third quarter this year compared with the same period in 2022 in London, New York and San Francisco, according to preliminary data from CoStar, a research company focused on commercial real estate.
The sustained slowdown in the office market comes as higher borrowing costs and low occupancy are compressing building valuations while companies including Amazon, BlackRock, Lloyds Banking Group and JPMorgan have in recent months introduced staff attendance mandates on given days.
“The big ticket transactions [are] really not happening at the moment,” said Mark Stansfield, director of UK analytics at CoStar. “There is still a divide of expectations between sellers and buyers.”
Jonathan Gardiner, head of real estate agent Savills’s central London office agency, said large companies were holding off pulling the trigger on real estate deals because they were “still trying to understand their spatial needs” as working patterns shift from Covid-induced work from home to hybrid working and an increase in mandated office attendance.
Vacancies in San Francisco offices hit a two-decade high and reached a 20 per cent rate in the third quarter — up from 6.3 per cent at the onset of the pandemic. The Californian tech hub only generated £454mn worth of investment in office space in the period, less than a third of its pre-pandemic average.
“Places like San Francisco have been hit particularly hard given the level of hybrid working and levels of tech occupation over there,” said Stansfield. Tech workers have embraced remote working more than other office workers, according to analysts.
Investment in London rebounded slightly to £2bn in the third quarter thanks to a flurry of deals in the City fuelled by appetite for green, modern and newly refurbished offices in central London which are in short supply. However, it remains far below its pre-pandemic levels and more than a fifth lower year on year.
The tech and media sectors historically boosted London’s office take up, but companies in those industries are shedding space as they experience slower growth, said Gardiner. London’s vacancy rate hit 9 per cent in the third quarter, the highest since CoStar started recording the data in 2003.
The picture in New York was similarly grim in the third quarter, according to CoStar data. Investment in the city’s offices fell by 60 per cent on the previous quarter while its vacancy rate remained at 13.4 per cent, hovering near a two-decade high.
In a positive sign for the commercial real estate sector, leasing showed signs of renewed activity in the third quarter. Large deals in London’s City and West End drove a 19 per cent quarterly jump in leasing activity in the UK. In the US, leasing activity rose by 13 per cent overall despite falling in San Francisco.
