What will the office market look like in 2 years?

The wide-spread shutdown of offices in response to the COVID-19 pandemic began in earnest in the early spring of 2020. Since then, there’s been varied speculation about the “new normal”. Now that effective vaccines are at hand and a significant portion of the population has been vaccinated, how will the change in business practices and the experience of the forced work from home (“WFH”) experiment affect the office markets?

conflicting signals

The news is filled with reports from major employers about the planned return to office and the extent to which WFH is with us to stay. Among the conflicting stories:

• Amazon plans a return to an “office centric culture” by the fall.  While it’s unclear the extent to which Amazon will allow a long term WFH scenario for some employees, it is clear that the company strongly values the collaborative environment of an in-office culture.

• JP Morgan Chase chairman Jamie Dimon has frequently commented on the need to return to the office.  While some level of WFH is likely on a permanent basis, workers will mostly be required to work in office.  For example, according to a recent Wall Street Journal article, employees on some teams will be permitted to schedule WFH days, but not on Mondays or Fridays.

• Salesforce.com and Zillow announced last summer that most of their workers will have the option to work remotely on a permanent basis.

• IBM is an interesting story in itself.  The company famously banned WFH in 2017 and occupies approximately 70 million square feet of space.  The company now says it expects to employ a hybrid model going forward, which will evolve over time, but it expects perhaps as many as 80% of its employees working remotely part time.  Even at that, however, those employees will likely be required to be in the office at least three days per week.

• WeWork’s CEO recently opined that “the least engaged are very comfortable working from home”.   Others with vested interests in the return of office use to pre-pandemic levels have cited the need for face-to-face collaboration and maintenance of company culture as reasons why WFH, while not necessarily a passing fad, is not going to be a long term negative for office markets.

Smaller, lesser known office users have their own varied approaches:

• A small but established non-profit, which had planned on a significantly reduced office footprint due to a WFH trend prior to the pandemic, opted to eliminate its office altogether and have all employees WFH permanently.

• A growing software and consulting firm that signed a new lease and relocated several months before the onset of the pandemic put 80% of its space up for sublease, embracing a long term primarily WFH model.  One of the key positives the company has experienced is the ability to hire technical professionals from most anywhere, since the geography of the office was no longer a barrier.

• A national law firm is experimenting with a large scale hoteling model, where those that expect to be in the office three or more days per week are assigned a permanent office or desk and those who plan to work more remotely will be assigned a temporary office on those days they will be in the office.  This approach seems to be more relevant in larger offices of the firm with longer commuting times than in offices in smaller markets.  While the firm continues to grow overall, the total amount of office space required is mostly shrinking a bit or remaining stagnant.

• A Chicago based trading firm, whose growth trajectory was somewhat interrupted by the pandemic, is expecting that growth trend to continue and will be taking on more office space to accommodate it.

why the office market is changed forever

To believe that office space usage and market absorption will return to pre-pandemic levels in the foreseeable future is to ignore the pandemic’s lessons.

Misleading Statistics
Vacancy rates, which are often quoted as indicative of the office market’s health, are misleading.  In this changing landscape, vacancy rates are likely a lagging indicator.  Much of the space that is leased today (albeit not occupied) is not reflected in those vacancy statistics.

Success of WFH
At a minimum, we are likely to see a continuation of the WFH trend that was already prevalent before the shutdown.  Companies that previously shunned the concept have learned that employees can be productive, in many cases more so, working from home permanently or with some form of hybrid model.

Part Time WFH / Hoteling
Many companies that have put massive amounts of space on the sublease market are likely to maintain a reduced office footprint on a long term basis.  Even IBM, which expects to have the majority of its employees required to be in the office at least three days a week, anticipates shedding a substantial amount of its 70 million square feet of space.

Why the Office Market is Not Doomed

Paraphrasing Mark Twain, reports of the office market’s death have been greatly exaggerated.  A number of factors point to a strong office market.=

Economic Growth
The onset of the pandemic was a shot to the gut for the U.S. economy.  There was a sudden drop in employment levels and GDP.  The resilience of the economy and recent scarcity of skilled and unskilled labor has been nothing short of remarkable.  Overall economic growth is returning rapidly to pre-pandemic levels, and office investors are taking notice.

Different Space Utilization
Much of the trend seems to be not away from office usage, but designing and utilizing it in a much different way.  It may be that call center and other densely populated uses, with their bench seating and occupancy by as many as 10 or 12 employees per 1,000 square feet leased, may be a thing of the past.  Those users in particular may find themselves in fact leasing more space to accommodate ongoing health concerns.  Even when COVID-19 becomes more of a memory than a current reality, the lessons learned for future health crises will dictate a more liberal spacing of the workforce.

Company Culture
While WFH has proven to be effective in a lot of cases, many employers are leery of its long term effect on company culture, training and collaboration.  Scheduled Zoom calls, email and phone calls can be useful tools, but missing is the brief impromptu meeting, collaboration with selected teammates, and one on one training experiences that help build a company culture.  Working in an individual “silo” with only occasional interaction with co-workers to many will seem much less fulfilling and there will be little sense of belonging.

WFH Gets Old
Prolonged WFH has many longing for a return to some sort of normality.  It may be convenient, eliminating or minimizing the previous dreaded commute time, but for some “going to work” was an escape from the home environment.  Said a little less harshly, working outside of the home makes one appreciate the comforts and pleasant surroundings at home much more.  The value of that separation of work and home cannot be ignored.

What’s the Bottom Line?

No one can know for certain what the long term impact on office real estate will be.  It is premature to make that judgment now.  Many companies are just now preparing for re-occupancy and their longer term plans are not set.  As existing lease commitments expire, employers will be evaluating how they work, how successful WFH has been, and what their requirements will be going forward.  Predicting office needs has always been imperfect as companies grow or otherwise change, but now it will likely be even more of a challenge.

Positive forces affecting office space somewhat offset the negative forces brought on by the pandemic, but the general sense seems to be that there will likely be some net decrease in the amount of office space leased as compared to pre-pandemic levels.  Whether we’re at a level two years hence that is 75% of the pre-pandemic leasing or 95% is the significant unknown.