A new report on the office-sector outlook by CCIM Institute chief economist and Red Shoe Economics founder KC Conway provides a lot to unpack. As part of a comprehensive examination of office use and demand during the pandemic, pre-pandemic and in the future, Conway proposes a couple of new yardsticks for investors seeking data: “Kastle Systems and sublet office reports by major brokerages such as Colliers.” 

Kastle, he explains, handles electronic keycard systems allowing access to office buildings for many companies and property managers. “Measuring this activity is a great proxy for whether the workforce is returning to physical office space,” Conway writes.  

As the vaccine rollout began in the first quarter, less than 25% of office workers were back on the premises, according to Kastle data. The figure wasn’t all that much greater seven months later: just over one-third had returned to the office by mid-October. 

“The company’s Back-to-Work Barometer can be as useful a proxy for office property investors and brokers as the TSA Passenger Count is to the leisure and travel sector of CRE,” writes Conway. “The TSA metric foretold the recovery in travel from less than 500,000 daily passengers in Q1 to now more than two million. I am in the camp that believes the Kastle Systems Back-to-Work Barometer will be just as predictive for the recovery of office utilization.” 

Colliers resumed tracking sublet vacancies a year ago. The firm’s Q2 quarterly reports showed that the U.S. had more sublet vacancy than at any point since data were first tracked in 1990.  

Across most major markets (excluding the San Francisco, Houston, New York, Chicago, and Washington, DC elevated outliers), sublet vacancy now adds approximately 2% to the overall vacancy rate compared to pre-COVID-19, Conway writes, citing Colliers data. Sublet vacant space rents are anywhere from 25% to 50% below market asking rents. 

Conway notes that the updated nationwide office market statistics from Colliers in mid-2021 still poses cause for concern, especially when it comes to absorption and sublet office vacancy: 

Absorption: “Negative absorption over the past five quarters stands at a cumulative 153.1 msf, greatly surpassing the 92.4 msf seen during the [Great Recession], which spanned nine quarters.” 

Sublet Space: “Sublease space remains a key contributor to the increase in vacancy rates. There is now a record 208.6 msf of sublease space available across the U.S. office market, significantly higher than the prior peak of 143.3 msf in 2Q09.” 

Near term, Conway writes, “these negative absorption and sublet vacancy statistics show that investors should continue to anticipate material competition on rents from sublet vacant space. As a result, a significant repricing of office property is ahead. Vacancies won’t be the earliest warning signal of trouble ahead for office CRE – the Kastle Back-to-Work Barometer and sublet vacancy metrics will.”