Positive Trends in the Office Sector

The office market has been challenging, as both heaven and the tax authorities are aware. Recently, Goldman Sachs reported that office vacancy rates will continue to climb as a result of work-from-home policies, office tower vacancy rates are increasing, and metro area office property sales are generally down year over year in the first half of 2023.

But despite everything, “there is a glimmer of hope in the news surrounding office properties,” as Trepp put it.

One of the news items is that organizations like Google, Amazon, and Meta are promoting going back to work, “signaling a shift in their approach to remote work,” as Trepp’s Vivek Denkanikotte put it. These large corporations must maintain space since they will soon have a three-days-per-week in-office requirement. The weighted average debt service coverage ratios for Amazon and Google properties with outstanding loan balances, according to Trepp, are 2.30 and 2.11, respectively. This indicates significant strength and suggests, though does not guarantee, that refinancing the loans, which total $2.70 billion between the two and mature by the end of 2024, might be simpler than in recent years.

Similarly, although Trepp didn’t mention it, several major financial services firms have also been pressuring staff to return to work, which may indicate another significant economic sector supporting numerous loans.

The metro performance comes next. According to Denkanikotte, the metro areas of San Francisco, Chicago, and Seattle are three of the biggest in the country in terms of office exposure and are home to enormous office buildings for prestigious businesses like Google, Meta, and Amazon, among others. “Office performance in these places was dismal for the majority of 2023 as many of the aforementioned corporations decided to reduce their office presence. Recent data, however, have shown the following encouraging signs.

June and July 2023 saw higher office visits than in any previous month since the epidemic, according to Placer.ai’s July summary, which noted that “return-to-office mandates appear to be slowly but surely moving the needle.”

Washington, D.C. is a regional city. Has the shortest year-over-four-year (Yo4Y) visit gap of any assessed city in July 2023, placing first in total office recovery, according to Placer.ai. “However, San Francisco witnessed the largest year-over-year (YoY) increase in visitors, despite the city’s generally slow return to the office. Even while foot traffic in San Francisco offices decreased somewhat in July 2023 compared to the previous month, it remained higher than it has ever been since COVID. In July 2023, there were more office visits in other cities as well, including New York, Denver, Boston, and Chicago, than there had been prior to the pandemic.

“According to Trepp CMBS data,” the company noted, “San Francisco has the third-largest allotted amount for office assets, at $12.3 billion, behind only Los Angeles and New York. More than 71% of this balance have a DSCR (NOI) above 2.00.

Positive office absorption has been observed in Chicago’s downtown business district. Seattle had more openings, but the downtown area has more workers.

“As we look ahead to 2024 and the maturing office loans, the data reveals a mix of occupancy rates, but the overall trajectory appears to be toward recovery,” noted Denkanikotte. This confidence is further supported by the availability of Class A buildings and the enthusiasm of Fortune 100 corporations to reopen their operations. Despite the significant difficulties the office sector has endured, these optimistic patterns suggest that a better future may be ahead, providing hope and the opportunity for the industry’s rebirth.