California office space occupancy stalls at less than half pre-pandemic levels

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(The Center Square) – According to the latest report from Kastle, an office access control company, office occupancy has stalled nationally at around half of pre-pandemic levels, with significantly worse occupancy for Los Angeles, San Jose, and San Francisco metros than the average for the rest of the nation’s top 10 cities. Real estate experts say many potential tenants are hesitant to sign standard three to five year leases major corporate landlords tend to demand, especially in declining urban areas where futures are uncertain.

Kastle, which uses data from its systems installed in 2,600 buildings across the country, uses pre-pandemic occupancy as its baseline and found Los Angeles occupancy peaked at 52.7% last week, with San Jose coming in at 49.3% and San Francisco at 38.8% respectively. The highest occupancy rates among the 10 cities were in Houston, Austin, and Chicago, which came in at 65.8%, 65.3%, and 62.1% respectively. In some cities, reported occupancy hit the low 20s, though this information includes the days before Thanksgiving when occupancy tends to drop precipitously.

“Office leasing is all predicated on three to five year terms but a lot of the tenant base is unwilling to sign these longer leases,” said Connor Macleod, a commercial real estate broker at Kidder Mathews, to The Center Square. Major landlords will offer to build out a space for a tenant’s needs but need that three to five year lease as security. All of these tenants looking at the state of downtown Los Angeles are wondering where the area is going to be in three years, and they don’t know if they can make it that long.”

Macleod also cautioned against relying on looking at major commercial as indicative of the overall market, noting that while large landlords are facing headwinds, demand for spaces for small and medium size offices and businesses remains strong.

“There’s still decent office occupancy and a market even for properties for sale that are medium size offices people can occupy as owner-users,” continued Macleod. But I think there’s a disconnect in reality and in pricing between major office landlords and the market for the spaces that they offer.”

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