Record amount of US office space lies empty

Editor's note: Three years after the onset of the COVID-19 pandemic, the United States stands at a 30-year high vacancy rate of office buildings. This page takes a close look at economic challenges the country faces, such as the empty workplace crisis exacerbated by massive layoffs in some of the biggest technology companies.

Value of buildings is declining despite mandatory order to return to workplace

A record amount of office space across the United States is sitting empty, producing a 30-year high vacancy rate, because of the aftereffects of the pandemic and the trend to work from home.

Vacant office space in the US accounts for 17.8 percent of all offices, the real estate company Coldwell Banker Richard Ellis, or CBRE, in California, said. It is the highest amount recorded since the early 1990s.

It comes amid a big change in the way tens of millions of US people are working, fears of a looming recession and companies either offloading their buildings or not renewing leases, as every sector adjusts to a new normal.

Stijn Van Nieuwerburgh, a professor specializing in real estate at Columbia Business School in New York, said that among businesses there are "more short-term leases, tenants are either not renewing leases or renewing leases but taking less space, (and) some tenants are taking less space but in higher-quality, newer buildings".

In New York, the largest office building market in the country, with more than 50 million square meters of office space, the amount of vacant office space soared in the first four months of this year, said Colliers, a real estate company in Toronto.

In February the vacancy rate was 17.4 percent, the highest rate recorded by the company since it began collecting data on New York's office market in 2000.

Steven Roth, a millionaire real estate developer who has two key office buildings in Midtown New York, recently spent $1.2 billion on overhauling them. Roth, chairman of Vornado, the largest commercial landlord in New York, told investors that working in an office on a Friday is "dead forever" and "Monday is touch-and-go".

Vornado is building two office blocks near a slated new development of the key transit hub of Penn Station.

The "office building of the future", known as Penn 1, recently had a $450 million renovation and increased its asking price for rents from $60 a square foot (0.1 sq m) to $100 a sq ft. Vornado said it had leased 65,032 sq m in the building, and it is almost completely leased.

Its high-profile tenants include Samsung Electronics and Cisco Systems. The picture is different in its other building, Penn 2, a high rise with 167,225 sq m.

It will lease several floors to the entertainment venue Madison Square Garden, which will use it as its headquarters. However, it is still looking for other tenants.

Roth said the future of work will involve more flexible living spaces that combine offices with residential spaces and retail areas cutting out the commute for workers.

His Penn 1 has a library, restaurants, lounges, offices and a lobby with sports screens open to the public. Vornado's future plans include more offices near Penn Station.

"During the pandemic, the most significant change in the office sector is that various types of space coexist to satisfy different needs," said Yildiray Yildirim, chair of the William Newman Department of Real Estate and director of the Steven L. Newman Real Estate Institute at the Zicklin School of Business, Baruch College, City University of New York.

New York officials watch the office sector closely because it is crucial for the economy. It generates significant property tax dollars for the city, with at least 40 percent of the city's budgets coming from commercial buildings, including offices. This accounts for about $31 billion of the city's annual budget.

Amid changing times, the city is preparing for office vacancies to remain high until 2026, which it says could impact state and city budgets.

It collected about $6.8 billion in property tax revenue from office buildings in the fiscal year ending in June, compared with $7.5 billion in the previous fiscal year. However, the value of office buildings has fallen by $28.6 billion, the Office of the New York State Comptroller said.

The amount of office space available in the city of New York is more than in Houston and Dallas-Fort Worth combined. The areas with the most office space are the financial district in Lower Manhattan and Times Square, which has 19.9 percent, according to JLL, a commercial real estate company in Chicago.

Simultaneous layoffs

In another major business hub, Silicon Valley in California, home to big technology companies such as Apple, Google and Meta, at least 706,063 sq m of office space is available, compared with 250,838 sq m in 2019, said CoStar Group in Washington, which provides information, analytics and marketing services to the commercial real estate industry.

Many of the biggest companies have recently paused or ditched offices or plans to buy buildings.

In April Google halted its move to open a 32.39-hectare mixed use space dubbed Downtown West Project in San Jose, California, which would cater to 25,000 employees, CNBC reported.

The plans called for 678,192 sq m of office space, 4,000 residences and 6 hectares of property, including parks and a community center, and it now looks set to go ahead.

Additionally, in February, Google freed up 120,773 sq m of office space in Mountain View and Moffett Park, California, for sublease. Overall, the company will spend $500 million to reduce its office space as it reduces staff.

In January Microsoft announced that it will let go of 157,935 sq m of its office space by next year, amid a planned round of layoffs of 10,000 employees this year.

Meta gave up 65,032 sq m of Silicon Valley office space after it closed its offices in Sunnyvale, California, The Wall Street Journal reported. It will cost the company $2 billion to combine offices as it downsizes.

In July last year Amazon stopped a large construction project of six new offices in Bellevue, Washington state, and Nashville, Tennessee.

Last month, reviews app Yelp said it would close its last remaining office in Phoenix, Arizona. All employees will now be remote.

In northern California, CoStar Group found that office space in Palo Alto, San Jose and Sunnyvale increased by 17 percent last month, compared with just 11 percent in the corresponding period in 2019.In Mountain View, it was up by 20 percent.

In San Francisco the picture was similar. Office vacancies were at 25 percent last month, three times as many as in June 2019.

In March 2020 initial stay-at-home orders during the pandemic were given by cities countrywide. Three years on, the trend continues, to the dismay of many companies.

Kastle Systems, which monitors building swipes, estimates that last month only 39 percent of its pre-pandemic workers in San Jose had returned to the office, but the average was 50 percent in other markets, including New York.

In an effort to get back to the old normal, companies are beginning to order staff back to the office.

In the technology sector, Meta has told its workers to return to the office for three days a week starting in September.

Since April Google has also required its employees back in the office at least three days a week, but many have ignored the request, The Washington Post reported.

Amazon and Apple have both told workers to be in the office three days a week. Apple's chief executive Tim Cook said the aim is to restore "in-person collaboration".

Twitter's chief executive Elon Musk issued an ultimatum to employees in November saying that if they did not return to workplaces for at least 40 hours a week this would be tantamount to their resigning.

Employees of the cafe chain Starbucks have also been told to turn up for work three days a week.

In the banking sector, which led the return to the office, most staff are required on site.

JP Morgan Chase has cut out hybrid work altogether. Citibank employees were told to return to the office for at least two days a week in March last year. Goldman Sachs had 65 percent of employees back in the office by October.

However, as chief executives encourage workers to return, about 32 percent say they would rather remain remote, the Californian recruiting company Robert Half said. That means they would have to take a pay cut if they want full-time remote work.

Yildiray said one thing that will encourage workers back to the office is more flexibility.

"Even before the pandemic we observed rising demand for flexibility in the use of office space over the past decades. In this context the pandemic induced a rapid transition from the traditional office environment to flexible space."

Some employers, including Walmart Inc and Colgate-Palmolive Co, are even willing to pay the relocation costs of new employees to enable them to live closer to their workplaces so they can easily get to work several times a week.

Job advertisements mentioning relocation costs on ZipRecruiter.com have doubled to 3.8 million this year, compared with fewer than 2 million in 2020, The Wall Street Journal reported.

The cost of moving a new employee is now between $19,000 for someone who rents to $72,000 for a homeowner, said ARC Relocation, a company in Virginia that relocates employees.

Among the companies that still have offices, many are discovering that real estate is one of their biggest overheads and will offload it to save money.

The average rent for an office rose 1 percent year-on-year to$35.42 a square foot during the quarter, but it is down by 14.8 percent on asking rents before the pandemic, CBRE said.

The number of offices being leased fell 35 percent last year to 3.18 million sq m. The number of subleases rose to 17.56 million sq m.

Van Nieuwerburgh, also co-author of the research paper "Work From Home and the Office Real Estate Apocalypse", warns that the overall impact of less office use could mean that the value of buildings will fall 40 percent, or $411 billion, by 2029.

This knowledge is forcing landlords of commercial real estate to adapt to changing market conditions.

"Landlords are offering higher amounts of 'tenant improvements', basically money to improve the space the way the tenant likes it, also offering longer periods of free rent on the lease," Van Nieuwerburgh said.

Converting plan

The Mayor of New York, Eric Adams, with the support of the Governor of New York State, Kathy Hochul, is implementing another plan: turning some offices into apartments.

In January the Department of City Planning's Office Adaptive Reuse Task Force issued recommendations for turning offices into apartments.

It charts ways that the city could use to update what are regarded as outdated zoning restrictions. These strict laws regulate the use and physical dimensions of buildings and dictate whether or not they can be converted into residential properties.

In March Adams and Justin Brannan, a member of New York City Council, toured an office building being converted to housing in Lower Manhattan.

"We need this year's budget to include programs that make it easier to convert offices into homes," Adams said.

New York City Department of City Planning Director and City Planning Commission Chair Dan Garodnick said: "We need to make it easier for underutilized offices to convert to housing and, for the first time, actually incentivize permanent affordability in the process."

For properties with offices built before December 1990, the city wants to adjust the New York State Multiple Dwelling Law to allow the conversion of more than 11 million sq m of office space.

The plans could affect vacant offices in downtown Flushing and the Bronx in the city and could create 1.49 million sq m of space for apartments.

belindarobinson@chinadailyusa.com