Office space vacancies in the US and London climb to 20-year highs

Office space demand in major global hubs are undergoing a notable contraction, with vacancy rates touching 20-year highs. This trend persists even as companies intensify efforts to bring employees back to the workplace post the Covid-19 pandemic.

According to insights from commercial real estate research firm CoStar, the third quarter of this year saw a significant dip in office investments across London, New York, and San Francisco, compared to the same period in 2022. Factors such as increased borrowing costs coupled with diminished occupancy have impacted building valuations. Meanwhile, the likes of Amazon, BlackRock, Lloyds Banking Group, and JPMorgan have rolled out specific day mandates for staff attendance.

Mark Stansfield, Director of UK Analytics at CoStar, highlighted the current market scenario: "Major transactions are sparse. There's a noticeable disconnect in the expectations between sellers and buyers."

Jonathan Gardiner of Savills' central London office commented on the hesitancy of larger firms, noting, "These entities are recalibrating their real estate strategies in light of evolving work patterns, transitioning from remote work to a hybrid model."

San Francisco presents a stark picture, with office vacancies at 20% this quarter, a leap from 6.3% at the pandemic's outset. Moreover, the city's investments in office spaces stand at a mere £454 million, a drastic drop from its pre-pandemic figures. "The pronounced shift towards hybrid work, especially within the tech sector, has impacted cities like San Francisco more acutely," Stansfield added.

London's office investments, however, witnessed a slight uptick, reaching £2bn this quarter, driven by demand for eco-friendly, modern, and renovated office spaces. Nevertheless, this figure lags behind pre-pandemic benchmarks, being over a fifth lower year on year. Gardiner pointed out the tech and media sectors' waning demand, which previously bolstered London's office space requirements.

New York’s commercial real estate outlook in Q3 was somber, with office investments plunging by 60% from the previous quarter and vacancy rates nearing a two-decade peak at 13.4%.

In a positive sign, the third quarter saw increased leasing activities, with significant deals in London’s prime locales, leading to a 19% quarterly surge in the UK. The US followed suit with a 13% increase, although San Francisco bucked the trend.