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How Will the Office Market Evolve?

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Photo by Alesia Kazantceva on Unsplash

No sector of commercial real estate faces more uncertainty going forward than offices. Companies found during the pandemic that work can be accomplished productively from home, and many workers found that they prefer shorter commutes and more flexibility.

Although workplaces will get back to some semblance of normal after the pandemic is no longer a health concern, there will be no going back after the pandemic. Demand for office space will be reduced, and workspaces will be redesigned. The only question is how much of a disruption will occur.

Offices have taken quite a hit from COVID-19, even though the measurable cost has been obscured by the long-term nature of office leases. The U.S. office vacancy rate climbed to 15.9 percent as of April, up 280 basis points year-over-year, while sublease space has more than doubled during that time, according to Yardi Matrix.

That bump, however, is just the tip of the spear. Only about a quarter of downtown office workers nationally reported to an office as of April, with the percentage closer to 15 percent in New York City and San Francisco, according to security firm Kastle Systems. The growth of work-from-home has made going to an office an optional activity at many firms. The question is not whether companies will reduce their office footprint post-pandemic, but by how much.

Demand for space barely scratches the surface of the considerations faced by owners and occupiers. The industry must come to grips with a host of factors, including when workers can safely return; how many people will use offices and how often they need to be there; where offices should be located; how offices interact with lifestyle preferences such as commuting and walkability; how to re-design space to attract and maintain talent while meeting functional needs; and how to do all this while dealing with mandates to improve energy efficiency and cut down on greenhouse gas emissions.

The industry is facing a “quantum fundamental shift,” Jeff Adler, vice president of Yardi Matrix, said during Yardi’s May 13 Industrial & Office National Outlook webinar. “The sector is at the beginning of a wrenching multi-year rethinking of the nature of work. Everything is in play.”

Where to Work?

The percentage of workers reporting to an office is expected to triple to 75 percent by year’s end, said Benjamin Breslau, chief research officer at JLL, speaking last week on a panel at the Urban Land Institute’s virtual spring conference. He predicted work-from-home will double from pre-pandemic levels to 20 percent of workers. Daniel Ismael, a senior analyst at Green Street Advisors, said at another ULI panel that the average worker’s average weekly time in the office will likely drop from 4.5 days before the pandemic to 3.5 days.

A consensus has formed around the idea that most companies will adopt more flexible arrangements, but what that means for demand depends on the details. In terms of how much space is needed, there is a big difference between giving employees a choice to be fully remote and requiring them to be in an office part-time.

The primary question hanging over the industry is how office utilization will change after the pandemic ends. Decisions are complicated not just by employee preference but by the nature of the job and the industry. Some types of knowledge work (such as programming) can be performed well anywhere, but others benefit significantly from a collaborative environment. “Companies in the same industries will have a wide divergence,” Ismael said.

While a part of the office space decision will be driven by the type of jobs and corporate culture, companies will also have to consider another complex issue—employee preferences. If proximity to an office is no longer as important, how will that change workers’ preference for where they want to live? In the years leading up to the pandemic, the default assumption was that young knowledge workers wanted to live in an urban environment. Job growth over the last 20 years has been concentrated in urban areas, even in secondary and tertiary metros.

For a full analysis, see: https://www.cpexecutive.com/post/quantum-shift-looms-for-office/

About the author

Paul Fiorilla

Paul Fiorilla has 20 years’ experience as a researcher and writer in the commercial real estate markets. He previously spent six years as a vice president of research at Prudential Real Estate Investors in Madison, N.J., where he oversaw publishing of outlooks and thought leadership research. Before that, he covered real estate capital markets and CMBS for 12 years at Commercial Mortgage Alert.

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