As the dust begins to settle a bit on the COVID pandemic, many organizations are wrestling with the decision of whether to bring everyone back into the office. Many executives and managers are urging a higher level of Return to Office (RTO), while employees tend to prefer working almost entirely from home. As a data nerd, I like to look at facts and figures, not just anecdotal information. When trying to get a sense of RTO rates, there are two pieces of data that help form a picture in my mind. The first is office vacancy rates, and the second is office occupancy rates.
Office vacancy rates indicate the percentage of office space that is sitting vacant in a particular metropolitan area. For example, a 15% vacancy rate indicates that 85% of all office space in a metro area is occupied by commercial tenants in existing leases, while 15% is vacant. The National Association of Realtors (NAR) publishes quarterly office vacancy rates for over 130 metropolitan areas in the United States. Office vacancy rates have risen due to COVID, with 75% of the metro areas having higher vacancy rates than before the pandemic. It would appear that the pandemic has had a direct impact on these higher vacancy rates.
Office occupancy rates indicate the rate of employee occupancy within individual office spaces. For example, a 60% occupancy rate would indicate that 60% of the private offices and workstations within an organization’s office space are used on the average workday, and 40% are sitting vacant. While it can be difficult to gather reliable data on occupancy rates, digital access data gathered by secure access companies provides useful insights. One such company is Kastle Systems, which operates security card access to office buildings and suites.
Kastle Systems has leveraged their network of entry app, keycard, and fob usage in 2,600 buildings and 41,000 businesses across 41 states to create a Back to Work Barometer. This measure averages occupancy rates in ten large metro areas, with results showing 90%+ occupancy before the beginning of the pandemic, falling precipitously to 14.6% by mid-April 2020, just one month after the pandemic began to shut things down. The occupancy rate has risen gradually since that time, averaging 47.3% as of the third week of September 2022. While 47.3% is certainly much higher than the early pandemic occupancy rate, it is just over half of where it stood pre-pandemic.
By merging the occupancy and vacancy rates, we can get a better sense of RTO progress for some of the largest cities in the country. The ten metro areas that Kastle Systems tracks are New York City, San Jose, Washington DC, Dallas, Philadelphia, Austin, Chicago, Los Angeles, Houston, and San Francisco. Overall, seven of these areas have occupancy rates below 50 percent. The lowest occupancy rates are in San Francisco (39.2%), San Jose (40.4%), and Philadelphia (40.8%), while the highest occupancy rates are in Austin (60.5%), Houston (57.6%), and Dallas (53.8%).
The third quarter 2022 vacancy rates from the NAR of the same 10 metro areas range from the highest vacancy rate in Houston (18.9%) and the lowest in Philadelphia (9.2%), with an average of approximately 14.5 percent. All ten metro areas have higher vacancy rates than they did prior to COVID, with the vacancy rates of Austin (+4.5%), New York City (+5.7%) and San Francisco (+9.2%) rising the most. Other metro areas with large increases in vacancy rates that aren’t tracked by Kastle Systems include Denver, Charlotte, Nashville, Portland, and Seattle.
So what do these statistics mean?
- RTO is slow and gradual. Even after two and a half years, most metro areas have yet to surpass the 50% mark where at least half of employees are going into the office on a regular basis. Working from home has become the primary work arrangement, or has been integrated into a hybrid work arrangement. The upward trend throughout the nation has been smooth and gradual since March 2020. At the current rate, it may be many more years before most metro areas get to even 60% occupancy.
- There are geographic variances. The Texas metro areas have higher occupancy rates than the California metro areas, especially those in northern California. The northeast metro areas, especially Philadelphia, are below the ten-city average. This has been the trend since the beginning of the pandemic and continues at this time. I believe we should continue to expect differences in RTO trends across the country, with the south outpacing the West Coast and northeast parts of the nation.
- Demand for office space is still there for now. Despite the widespread increases in office vacancy across many metro areas since the start of 2020, the third quarter 2022 rates are for the most part around 15% or lower, reflecting a weakened office market but not a total collapse. This suggests that employers are not yet eliminating large portions of office space, perhaps in the hopes that most of their workforce will return to the office before the end of their current lease. This may also be a function of lease terms that do not allow tenants to break the lease before the term expires. As existing leases expire and working from home becomes a more permanent part of organizational culture, we may see the demand for traditional office space dramatically reduce.
It will likely be many years – if ever – until a majority of employees are working in the office on a regular basis. Right now, working from home is the rule, not the exception. The RTO trends will need to be monitored over time, but my belief is that the rates will never return to pre-pandemic levels. Organizations will look to reduce, consolidate, and/or release space more and more in the coming years, and alternative workspaces will continue to become the norm. And although I’m a data nerd who will keep tracking the trends, I’m banking on my intuition on this one.