Office Buildings Are Still Less Than 50% Occupied. Who Should Worry?


Depending on where you’re standing and what day of the week it is, daily occupancy in the world’s office buildings ranges from about 20% to 70%. That’s low when you stack it against pre-pandemic averages, which were consistently closer to 80%. But owners of high-quality, well-located office buildings aren’t worried—and for good reason. Hybrid work is upending workplace norms and conventional wisdom in the commercial real estate space.

Recently, JLL brought together its property management leaders from the U.S. to Asia-Pacific to discuss what’s happening at their managed properties, from occupancy trends to amenity races to decarbonization strategies. One key takeaway is that COVID recovery has not been a straight line anywhere, and the shifting priorities of commercial real estate decision makers and corporate occupiers is impacting the way we invest in, manage, futureproof (and potentially value) office buildings.

So, what’s happening in and around some of the world’s most famous skylines?

Regional differences lead to common thread

In the U.K., daily occupancy in JLL-managed buildings was tracked starting about two to three months after the initial COVID outbreak. That daily occupancy now averages 47%, after bottoming out at 5% in early 2022 due to COVID spikes and restrictions. This region has since seen a slow build, with occupancy peaking on Tuesday-Wednesday-Thursday and very few people making the trek into the office on Monday and Friday. Companies in the U.K want flexibility as they navigate hybrid working, and as a result, many U.K. buildings are offering coworking / flex space that can be used for overflow.

Where things really stand out in the U.K. – and all of Europe, really—is progress in sustainability and net zero carbon strategies. Europe is leading the way in legislation and commitment to reducing emissions of its office buildings.

In Australia, daily occupancy tends to track a bit higher, with Brisbane seeing 70% and Sydney 50% to 60%. However, Melbourne, in the state of Victoria, saw the world’s longest COVID lockdown of 262 days, and now has just 30% to 40% daily office occupancy as the Victorian government encourages working from home. Victorians are going to sporting events and restaurants, but not venturing into the office at the same rate as other Australians.

In the U.S., daily occupancy is still low. Big cities range from 30-40% in New York and Chicago to 50% in Boston. There is general consensus that the U.S. is leading the charge in creativity and quality of office amenities, which is particularly important as owners and investors strive to bring a hospitality-focused environment to the office experience. Pet-friendly properties, especially, are important here as people (and their pets) were accustomed to hunkering down together through the pandemic.

Flight to quality is universal

JLL’s Future of Work research surveyed 1,095 corporate decision-makers across 13 global markets. Of those that responded, 72% agree that in the long term, the office will remain central to their organization’s ecosystems. It’s clear that corporate leaders are accepting, if not embracing, the fact that hybrid working is here to stay.

There has been a shift toward optimizing human performance, comfort and productivity. Yes, companies are downsizing, but they are also moving to the highest quality buildings in the best locations in an effort to give their employees a better experience than they are getting at home.

That means that owners of higher-end space are benefiting both from lease renewals and relocations from inferior properties, even if those are downsized leases. According to JLL’s third quarter U.S. office report, in the U.S. the highest quality “trophy” properties saw a change in occupied leased space of positive 1.7 million square feet, while the more commoditized space is considerably more challenged.

The swipes are deceiving

Historically, real estate values and performance measurement have been dictated by what can be measured versus what should be measured. But lessons learned in this unprecedented hybrid work evolution include something very important: Tenants in quality buildings are willing to pay for and upgrade their space whether their employees come to the office or not. Instead of worrying about the door swipes each day, owners and investors of these assets should continue to provide a place for productivity and inspiration.

This represents a sea change in real estate valuation, where declining daily occupancy was once seen as a predictor of future downgrades. In today’s environment, declining occupancy might only be chalked up to the weather or the day of the week. New metrics are on the horizon, including human engagement and workplace flexibility, that better reflect the role of the office today.

No one region has a crystal ball for the future of how office buildings will look, feel and function, but there are an increasing number of indicators that the best ideas are universal, focused on quality spaces that meet the needs of workers—and maybe even their pets.



Source link