The office market is showing signs of stabilization as companies offer amenities, such as outdoor decks, to lure workers back to their desks.
NEW YORK — As more companies recommit to an in-office culture, the nation’s retreat from office property may be ending.
In the third quarter of this year, one-third of all companies are requiring workers to be in the office five days a week, up 31% from the second quarter, according to Flex Index.
“We looked like we were on a path that we were going to see a drop continue quarter after quarter,” said Rob Sadow, chief executive of Flex Index. “All of a sudden in the third quarter we saw a shift in direction.”
Even with the back-to-office trend, the market is facing turmoil.
The vacancy rate stabilized at a near record level of 13.8%, up from 2019’s fourth quarter vacancy rate of 9.4%. CoStar Group data shows that since 2020’s second quarter U.S. office tenants have vacated close to 209 million square feet of space, the highest amount ever for a four-and-half-year period. Much of the vacant office space is being considered obsolete and likely to remain unfilled.
Missed payments and defaults continue to increase, with the number of delinquent office loans in September being converted into securities rising to 8.36%, the highest rate since November 2013, reported Trepp.
Distressed office loans eclipse difficulties in other commercial property types, which have been struggling due to high interest rates, according to lenders.
CoStar reported that leases for nearly 40% of the office space tenanted at the start of the pandemic have not matured, and when they do mature, many of those tenants are expected to reduce their leased space. Additionally, after eight consecutive quarters of contraction in office space, the amount of occupied office space essentially stayed flat during the second and third quarters.
Companies that are offering outdoor decks, fine-dining restaurants, and gyms are luring workers back to the office. Meanwhile, investor interest in distressed office properties has risen as prices for property fell.
Source: Wall Street Journal (10/29/24) Grant, Peter; Heeb, Gina
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