As I have written many times before, the last lingering symptom of the COVID-19 Pandemic is really its legacy: shifting the culture of work from the traditional office setting to working from home. But the statistics really don’t bear out this trend except in certain markets, and slowly but surely, the Return-To-Office (RTO) movement is starting to take hold.
The sudden slamming of the brakes on office construction across America prompted by the pandemic has been a downdraft on aggregate volume, as practically no new office construction has been initiated since 2020. Having said that, the statistics regarding existing office space are just not as grim as one might imagine.
For Example. Take SL Green for example, the largest owner of New York City office space and one of the largest office landlords in the world. Few property owners felt the office-market turmoil as intensely as they did.
As has been widely reported in the popular business press, the company suffered a surge in vacancy when the pandemic emptied out the city’s office canyons, and the firm struggled to find new tenants. Its shares plunged in 2020, then again after interest rates spiked in 2022.
But now, few investors are benefiting more from the office market’s budding recovery, as white-collar workers are spending more time in offices. These tech, financial services, consulting and law firms are seeking primarily high-end buildings in desirable locations, like many of the ones SL Green owns in its 32 million sq. ft. portfolio.
The company said it is on track to lease 3.5 million sq. ft. of space this year, exceeding the target it set last year by an eye-watering 1.5 million. Its share price has soared more than 65% in 2024, making it one of the top performing real-estate stocks this year.
The company has also been using its market clout to cut favorable loan extensions and modifications with creditors. Most landlords are being forced to seek such deals because mortgages made when interest rates were low are maturing at today’s higher rates.
Another Example. Take One Vanderbilt, for example, its 1,401-ft. trophy office building with a popular observation deck near Grand Central Terminal, which is fully leased at some of the highest rents anywhere. The company sold a stake in the building recently that valued the property at $4.7 billion, making it the most valuable office tower in the United States
New York’s office market is outperforming other cities due partly to the large number of financial-services firms, which are more aggressive than other businesses in bringing workers back to the office. For the first time since 2019, leasing volume this year in Manhattan has crossed the 30 million square foot mark.
And the statistics elsewhere are really not as bad as one might think; the vacancy rate nationwide stands at 13.9%, compared with 9.3% at the end of 2019, a less-than-5% difference, an amount that could easily rebound with even the smallest addition to the workforce – if RTO really takes hold. But some are projecting that vacancies will keep rising next year and into 2026 as tenants with expiring leases continue to downsize.
DOGE. The biggest impetus in growing the RTO movement that will descend on us early this year will be a well-known objective of Elon Musk’s Department of Government Efficiency (DOGE): the word is going out to Federal employees to either come back to work or be fired.
While that makes for a great sound bite, there is a labyrinth of civil service rules that will make this easier said than done, including any planned forms of retribution of Federal workers that is prohibited by law and protects even marginal civil service employees. Nevertheless, an initiative of this magnitude will embolden private sector employers to undertake the same take-it-or-leave-it approach, as JP Morgan Chase and Walmart have already done.
Historically, office construction has been an important driver of aggregate demand, especially with the trend towards high performance concrete towers versus the popular steel buildings of previous decades. Expect to see a recovery in new office construction, especially in Class A space, as the RTO movement continues to expand.
AVP Index. The AVP Pulse Index experienced a jump of 1.0% for the period, reversing a recent trend of a flattening line in the Index. More importantly, there was an additional jump in the annual growth rate, as it increased 7.9% year-over-year, a more-than-doubling of the growth rate of 3.5% reported in the last period. Over the past 36 months, the index increased 11.2%, down slightly from 14.0%. This is reflective in part on our firm’s rough estimate that we will finish the year with approximately a 5% pullback in overall construction materials volume.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on X @allenvillere.