The longer the post-pandemic turmoil in office demand continues, the more clues emerge about what separates the wheat from the chaff for this property type. The relative cost of living in an office building’s metropolitan area appears to be a significant factor.
Since 2020, several secular variables have become associated with office performance. These include the composition of the local workforce, the length of a typical commute and the urbanization of a building’s neighborhood. Factors such as the cost of housing and household income also bear relevance.
The National Association of Realtors publishes a list of median home prices for various metropolitan areas each quarter. According to the association’s list of median home prices reported at the end of 2023, markets with a median home price above $600,000 have experienced an aggregate decline in office occupancy of more than one percent of inventory in the past 12 months.
This metric is skewed somewhat by the most expensive cities like San Francisco. Its median home price is approaching $1.3 million and it is also an outlier in office occupancy decline, having posted a slide of more than 4% in the past year.
However, there appears to be a correlation as the 12-month net absorption, or the net change in occupancy, for office space has been negative in every major U.S. office market that has a median home price of more than $600,000.
Apartment rent is another measure of the cost of housing, and it has perhaps even a stronger relationship with office demand. Markets with an average asking rent below $1,500 per month have seen only a negligible amount of negative absorption in the past year, while office occupancy losses have approached one percent of inventory in markets with average apartment rents above $2,000 per month.
San Francisco is also a high-rent market, as are other coastal gateway markets that have seen shrinking office demand, including Boston, Los Angeles, New York, San Jose, Seattle and Washington, D.C. On the other hand, there are exceptions to the trend. High-rent markets such as Miami and Fort Lauderdale have seen positive office absorption, while office absorption has been negative in cities that have moderate apartment rents, such as Atlanta, Chicago and Denver. There are obviously other factors at play here – geopolitical issues, quality of life decline, etc.
