Opinions Differ on the Future of Corporate Real Estate
Just like nearly everything else, office vacancies are at a level entirely unprecedented.
Not only have businesses had to shift to remote work due to public health regulations in response to COVID-19, but many have also discovered that their workforce is just as (or even more) productive working from home.
While it doesn’t look like remote work is the future of work , at least not entirely, it is almost certain that post-pandemic, there will be a reduced need for office space.
Many big corporations such as Salesforce, Target, and Ford Motor have given up significant amounts of office space, and others are sure to follow suit. Some are even reducing their spaces to only 60 percent of their pre-pandemic capacities.
These drastic reductions have impacts beyond the pocketbooks of the landlords of these large properties – it will alter the very fabric of the surrounding city; physically, socially and financially.
Construction will drop off, restaurants and shops will have less clientele, and local governments and schools could be impacted by a drop in tax revenue.
The owners of these buildings themselves consist of a variety of individuals, insurance companies, pension funds, and other investors, thus indirectly affecting a wide variety of industries and financial institutions.
Since the pandemic started, the market value of office towers in Manhattan – the US’s largest business district – has declined by 25 percent, which equates to approximately $1 billion drop in property-tax revenue. Across the US, city center office vacancy rates have reached an incredible 16 percent, which hasn’t been seen for nearly a decade.
Some predict that these numbers are only to climb higher, as some corporations seeking to downsize are currently locked into real estate contracts (which can have a duration of about 7 years) and will continue to reduce space in the future as these leases run out. There have already been notices sent to landlords about ending future contracts, and subletting has been a way some corporations are already getting around paying full price for their unused spaces.
These long-term contracts have been cited as the reason for the lack of an entire market collapse, although rent prices have already dropped 10 percent in Manhattan. In addition, the stock prices of these big landlords, typically seen as stable real estate investment trusts, are trading significantly below their historical average. Corporate real estate is a unique case as other industries hit hard by the pandemic, such as hotels and airlines, are not suffering to the same degree, suggesting a downward trend that will outlast COVID-19.
When you take a look at the numbers, these results are unsurprising. Fitch Ratings showed that with employees working from home, merely 1.5 days a week could result in a 15 percent decrease in landlords’ profits, and 3 days home per week would result in a 30 percent decrease.
Landlords, however, seem not to be worried. They are confident their “class A properties” will remain in high demand and that the trends seen now are only temporary, pointing to the expansion of office space by major companies such as Amazon, Facebook and Apple as tell-tail signs. Whether this is a net expansion or merely a relocation to take advantage of the current market prices is unclear.
It is true that some collaborative corporate activities have not been easy nor successful during the pandemic; however, by only acknowledging this aspect, all the others that point towards the hybridized future of the workplace are ignored.
“Companies that work in person are going to be more successful going forward than those that work virtually,” Owen D. Thomas, chief executive of Boston Properties, said optimistically. While he bases this assertion on the current function of corporations, this confidence could be undermined by considering the negative impact that mandated in-office work could have on attracting new talent – an absolutely vital quality that any corporation must protect, no matter how big.
We are also confident that the office is not dead – however, the ‘new normal’ of the office experience will vary vastly from the pre-pandemic norm, with lots more remote and hybrid options and functionalities.
To learn more about the function and future of the hybrid workplace, check out our other articles:
- Why Your Company Needs a Remote Work Policy (& How to Build One!)
- Meeting Space Solutions for the Hybrid Workplace
- How Companies Are Trying to Attract Employees Back to the Office
- 5 Ways to Get Employees Excited to Return to the Office
Even if the vacancies seen now are short-lived as other corporations eventually fill in these spaces (as it becomes a more feasible option due to cheaper leases as well as decreased spatial needs), the corporate real estate market will still take this potentially slow transition as a blow.
The recession caused by the pandemic has varied from those experienced in the past as companies that employ lots of office workers have remained relatively unscathed. However, the appetites of these companies for office space may not be quite as big as it was previously.
The return to the office itself has been highly unpredictable and ambiguous, as predictions continue to fail to accurately project when employees will actually return to their normal in-office duties. About a quarter of US workers are currently working in-office, although this statistic has stayed relatively stable over the past few months, suggesting the reverse-exodus has yet to begin (if it ever will).
Areas with long average commutes and dysfunctional transit systems will see an even slower return-to-office as resistance to returning to these old inconveniences will be even greater. These cities have the greatest potential for radical restructuring as corporate culture undergoes the hybrid-overhaul.
“We are just going to be bleeding lower for the next three to four years to find out what the new level of tenant demand is,” admitted Jonathan Litt, Chief Investment Officer of Land & Buildings.
No one knows what the future of office culture truly is, and much trial-and-error will ensure. One thing is certain, however: it will not look the same as before the pandemic hit, and it will have impacts that go much beyond the corporate real estate market.