It’s no secret that office properties are, on average, struggling more than other property types. With tenants requiring less office space than they did only a few years ago, office prices are down by approximately 50 percent in urban locations, compared to pre-pandemic levels. The main driver behind this trend is now a familiar story – remote work makes it possible to substitute residential space for office space, which has reduced the demand to lease office space and left its future outlook murky. As a result, tenants have downsized or, in some cases, eliminated their space requirements entirely.

But office leases are typically long-term, and many tenants that now have a reduced need for office space might still have several years remaining on their lease. In other words, many tenants are still leasing more space than they need, which some decision makers may increasingly view as an unnecessary expense. Given the outstanding quantity of leased, but underutilized, space that remains in a number of major markets, this downsizing dynamic likely isn’t over yet. 

“As more office leases expire, tenants likely will continue to downsize and office availability rates, at least in some major cities, will continue their climb.” 

Traditional Measures of Emptiness Don’t Capture Underuse of Space

The two primary measures of a building’s emptiness are vacancy rates and availability rates. Vacancy rates measure the quantity of unleased space in a building. Availability rates are considered a more comprehensive measure than vacancy rates, as they include vacant space and also include space that’s available for sublease or space that is currently occupied but listed for lease (that is, space that will become empty soon). Before remote work was broadly adopted, office emptiness was determined by how much space was available for lease or sublease. In other words, emptiness was directly related to the availability rate.

Now, two things can drive office emptiness: more space being available for either lease or sublease, or employees not using space that is leased. Availability rates do not capture this latter category since underutilized space might not be listed for lease or sublease at all. So, we created a metric that estimates this underutilization.

The underutilized shadow (U-Shadow) vacancy rate is a measure of underutilized space that is currently leased. It refers to the increase in physical vacancy rates, as measured by Kastle System’s Back-to-Work Barometer, that cannot be explained by a corresponding increase in office availability rates compared with pre-pandemic benchmarks. Kastle’s Back-to-Work Barometer uses card-swipe data to compare office foot traffic in 10 major cities to a pre-pandemic benchmark. 

While Kastle card swipe data is useful, as it tells us how many people are going in and out of buildings now compared to pre-pandemic levels, it doesn’t tell us whether their employers still have offices that their employees could be going to. Put another way, the U-Shadow Vacancy rate tells us the percentage of office space that is currently leased, not being offered up for lease, but also not being fully used by workers. 

Underutilized Space Has Generally Turned into Available Space

Among cities covered by Kastle’s card swipe data, underutilized space has generally turned into available space. That is, as tenants use less office space, they’ve downsized, either partially or entirely. The following chart shows trends in availability rates and U-Shadow vacancy rates over the last year and half and compared to pre-pandemic levels.

Here, blue lines show traditional availability rates in the fourth quarter of 2019, the fourth quarter of 2022, and current. Green lines show the U-Shadow vacancy rate for the fourth quarter of 2022 and current. There is no U-Shadow vacancy rate in the fourth quarter of 2019 since the remote work shock that led to the underutilization of office space had not yet occurred. A decline in the U-Shadow vacancy rate can imply that tenants have downsized, if availability rates increased over the same time period. However, if availability rates didn’t increase, a decline in the U-Shadow vacancy rate may indicate that more people are coming back into the office. 

Availability rates increased in all cities compared to pre-pandemic levels, but the increase was most pronounced for San Francisco. Pre-pandemic, it had the lowest availability rate of these 10 cities at 8.6 percent, and now has the highest at 26.3 percent. Compared to a year and a half ago, U-Shadow vacancy rates have fallen in most of the other cities as availability rates have risen. This suggests that tenants have downsized, as underutilized space has turned into space available to lease. 

The two exceptions to this trend are Houston, where availability rates declined, and New York, where availability rates remained about flat. Available space is not increasing meaningfully in either of these two cities, even as underutilized space fell, which suggests that employers have been more successful in getting employees back to the office in Houston and New York than in others. 

Not Over Yet

Though there have now been multiple concerted attempts to get more employees back to the office, underutilized space in all 10 cities covered by Kastle remains in the double digits. This suggests that, as more office leases expire, tenants likely will continue to downsize and office availability rates, at least in some major cities, will continue their climb.