By Joy Wiltermuth
Life in America has been getting back to “normal,” except when it comes to the office.
Travel and dining have come roaring back, providing a vital shot in the arm to restaurants, hotels and businesses more than two years after the pandemic gripped the nation. The comeback has New York City expecting a 70% surge in domestic and international visitors this year from a year ago.
But as tourists flock back and more residents go out for fun (see chart), big-city skylines from New York to San Francisco still sit under a cloud of uncertainty from remote work.
The return-to-office rate in New York City was last pegged near 40% and closer to 37.5% in San Francisco, both of which still lag the national average of only about 44%, according to Kastle System’s 10-city office occupancy tracker.
That has led to a disjointed outlook for commercial properties, where scarcity has meant households face high prices for shelter, in addition to food and other necessities, while many office buildings sit more than half empty.
Effective multifamily rents rose 18.5% nationally in the second quarter from a year ago, while New York City jumped 28% in the same stretch “as more people moved back to the city, possibly in anticipation of going back to the office postpandemic,” BofA Global’s team led by Alan Todd, wrote in a weekly client note.
That contrasts with “signs of cracks in the office sector,” the team said, pointing to increasing vacancy rates and falling office rents in New York and San Francisco.
Is recession good for the office?
Todd’s team pegged the office vacancy rate near 18% nationally in the second quarter, with effective rents growing a modest 1.1% from a year before, even as effective rents in New York City and San Francisco remained negative overall.
Rent levels depend on the age of an office building and where a property sits in Manhattan or around the Bay Area, with some pockets seeing positive rent growth annually, but sharper decreases in struggling financial districts, according to BofA.
It is possible “that a large subset of the population enjoys city life but don’t necessarily want to work from an office five days a week, and that office space has been consolidating,” the BofA team wrote.
Although, with consumer inflation still high at 8.5% annually in July and recession worries on the radar, the BofA team also sees potential for travel and retail spending to be materially impacted in the months ahead, particularly if an economic slowdown turns into sharp job cuts.
“Counterintuitively, higher quality properties in the office sector may actually benefit if recession fears take hold and the unemployment rate rises as employers would gain leverage to mandate that employees return to the office,” they said.
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