Debunking the Biggest Office Market Outlook Myths

The outlook for the nation's post-pandemic office market is stirring considerable anticipation, as stakeholders eagerly monitor developments to ascertain whether a looming bailout scenario is on the horizon.

Amidst the uncertainty, this article serves as a debunking guide, dispelling prevalent myths about the office market's fate. By peeling back the layers of misconceptions, we aim to reveal the adaptability and resilience that define the commercial real estate sector, and highlight the moves that savvy tenants should make.

In an era of unprecedented change, the office market isn't disappearing; it's evolving, shaping itself to meet the evolving needs of a dynamic workforce. And it’s time for corporate tenants to get on top of the shift. So, join us as we explore the realities behind the headlines and uncover the promising transformations taking place within the realm of commercial office spaces.

1. The Office Market is Doomed

Yes, there has been unprecedented volatility, but most of the pain has been isolated to specific property conditions. There is not a total Office Apocalypse, it’s more like an office evolution. Buildings with outdated features are dying out, marked by low demand. Property owners can either adapt to the priorities of the new leasing environment or face default.

On the other hand, properties that do have the key features modern tenants want are surviving.

Take for instance the MetLife Building in Midtown Manhattan. The 3.1 million-square-foot office and retail property was 99% leased as of mid-August of 2023. This comes as the Manhattan office vacancy rate is under-performing in stark contrast with a 22.7% overall vacancy rate.

So how does the tower stay fully leased in the midst of a dismal office environment? How about the following points:

• It has premium features
• It’s been renovated multiple times
• It’s LEED certified
• There’s been investments in employee experience through: Building out attractive amenities (like a new 12,000-square-foot 8th Floor Skyline Terrace + Lounge) Creating fitness and wellness centers Installing easy access to the lobby through commuter hubs Improving the aesthetics of the lobby

This property is coming out of Manhattan’s Office Apocalypse unscathed because it is the poster child of the flight-to-quality. Since the pandemic, the option for corporate space usage forced tenants to scrutinize whether they were getting the most out of their commercial real estate investments.

This has driven a mass-exodus from undesirable property types. Instead, many companies downsized according to hybrid-work accommodation, stopped paying for unused space, and invested into streamlined, premium features.

This is evident through the climbing rent growth among Manhattan’s top tier office space as average rents for lower property classes decline.

“Net effective rent for trophy space in Manhattan averaged approximately $100 psf in the first quarter of 2022 and jumped to $112 psf in the first quarter of 2023.”

-GlobeSt

In fact, any recovery the post-pandemic office market in Manhattan has shown seems to be primarily driven by an ongoing shift towards high-quality properties.

An overwhelming 81.6 percent of tours in New York City involved Trophy and Class A office space in February 2023. This number reveals how quickly and persistently interest in these types of buildings climbs year-over year. In February of 2022, 76 percent of tours were for premium properties.

Interest in office space is dominated by higher class buildings.?So, the office market isn’t dying, it’s adapting. And the properties that are surviving the shift prioritize user-experience, technology, and sustainability.

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