We are THE office guys. We have dedicated almost 4 decades to simply leasing office space. Times are changing and we, along with our Tenants and Landlords, have to learn from the pandemic. We have to continually adapt to the market. On that note, check out this article and see below for my comments on this topic.
Here are my current thoughts on the office market:
— You may see an increase in workers at the office, but we are still not where we were pre-pandemic.
— Property taxes in big cities will face losses from the decrease in office users, which in turn will affect the people living in these cities.
— There is a big shortage of workers. So automate your business or make your office space WAY nicer to entice employees to return to work in the office.
— There is 18% vacancy and another 6% of sublease space available in Metro Phoenix. Companies looking for office space have the advantage of picking great locations with up-to-date amenities.
— Landlords are not only working in commercial real estate but in the hospitality business as well to meet the new needs of office tenants.
We have the unfair advantage of leasing office space through three major recessions. We are happy to help you find whatever space you are looking for or trying to lease. We also work with industrial firms, medical tenants, and alternative uses. We want to find your company’s perfect home. Don’t hesitate to reach out to us!
The “return to the office” won’t save the office
More people are going to offices more of the time. Offices are still in trouble.
By Rani Molla@ranimolla Updated Jun 5, 2023, 2:03pm EDT
The weak return to the office won’t solve the office market’s problems. Amir Hamja/Bloomberg via Getty Images
Rani Molla is a senior correspondent at Vox and has been focusing her reporting on the future of work. She has covered business and technology for more than a decade — often in charts — including at Bloomberg and the Wall Street Journal.
The so-called “return to the office” has been underway for a while now, and it’s a bit of a mess. Sure, more people are going to the office more often than they were a year ago, but we’re still eons away from where we were before the pandemic. And despite the gains in office attendance, many office buildings themselves are in big trouble — some of which goes beyond remote work and started long before the pandemic.
So despite what you’re hearing from some bosses, things will likely never go back to the way they were.
First off, the push to return to the office is not that robust. For every high-profile company forcing workers to return to the office, another lets them work where they wish. Companies that have instituted return-to-office policies have backpedaled or failed to enforce them. Even New York City’s mayor, who’s been bullish on the return to the office and who mandated a five-day-a-week return-to-office policy last June, has changed his mind as the city struggles to fill empty jobs.
The pain this is causing in the commercial real estate world is already visible. As office owners struggle to lease space or fail to secure more financing, delinquency rates for office loans are at their highest rate — 2.8 percent — since the pandemic began, according to data from finance analytics firm Trepp. That’s partly due to rising interest rates and trouble at regional banks, which account for most commercial real estate lending. Some fear that the recent failures of Silicon Valley Bank, Signature Bank, and First Republic could spread to other regional banks and further hurt the office market. Converting offices to other uses is expensive, and the credit to do so is hard to come by. So as more office leases come up for renewal or more loans need refinancing, the number of delinquencies will continue to jump.
In the next two years alone, $1.5 trillion in real estate mortgages are coming due and a lot of office property that took out that debt isn’t worth what it was when those loans were made.
“EVERYTHING IS GOING AGAINST THE OFFICE SECTOR RIGHT NOW”
And that pain will not be isolated to office building owners and their banks. Big cities like New York are heavily reliant on property taxes, which fund a huge chunk of the city’s budget, so losses there affect everyone in the city. Then there are the many businesses and people who were reliant on daily traffic to and from offices for their own livelihoods. Some have predicted an “urban doom loop” in which fewer people and less money coming in means fewer amenities and poorer quality of life, which leads to even fewer people and less money and so on and so forth.
Some people will certainly still go into offices in the future. It just won’t be as many people or as often, which means the amount of office space needed will go down. And the office space they go to will generally need to be nicer. The continued availability of open office space as office owners struggle to rent it out makes it a tenants’ market, where companies in a “flight to quality” are able to be choosier about the offices they pick.
As of now, the data shows that a majority of workers who were able to work from home still do some (46 percent) or all (19 percent) of the time, according to the latest data from WFH Research. Before the pandemic, these numbers were in the single digits. Stanford economics professor Nick Bloom, who helps run the project, thinks the number of workers in hybrid situations might actually climb to around 60 percent, with most of the gains coming at the expense of people currently in the office full time. That outcome is already showing up in survey data, as companies who said their workers would be fully on-site last year are now switching to hybrid work.
The weak return-to-office movement means that a lot of office space is being left empty. In North America, office utilization — the number of spaces that are used as a percentage of all spaces available — is currently at about 21 percent, less than half what it was pre-pandemic, according to XY Sense, a company that uses sensors to track office occupancy. That’s consistent with data from key card swipe company Kastle, which shows US office occupancy levels to be at 50 percent of its pre-pandemic levels.
Amir Hamja/Bloomberg via Getty Images
Despite more of them announcing returns to the office, “very few organizations appear to be enforcing returns, or approaching pre-pandemic levels,” Alex Birch, XY Sense’s founder, told Vox. “From what we hear in the market, many organizations are planning to downsize as leases expire and are measuring their space to determine by how much they need to downsize.”
Currently, office vacancy rates in America are at 18 percent, a figure last seen during the savings and loan crisis of the 1990s, according to real estate services firm CBRE. In the first quarter of 2021, even as many touted the return to the office, 16.5 million more square feet of office space became available than was leased — the weakest quarterly demand since the early pandemic. Meanwhile, people tried to get rid of the office space they have, so sublease availability grew to a record high.
As a result, office space is less valuable than it once was. A recently revised study, originally published last year, estimates that the value of offices around the country declined about a half a trillion dollars from 2019 to 2022, as remote work lowered the demand for office space. One of its authors, assistant professor of finance at NYU business school Arpit Gupta, says the future of offices isn’t much rosier, even with the latest push to return to the office.
“Back to the office is not going to be sufficient,” Gupta said.
Offices face more problems than remote work
Remote work would be difficult for the office market even without its other struggles.
“It’s being hit by cyclical and structural and sectoral headwinds,” Richard Barkham, global chief economist of CBRE, said. “Everything is going against the office sector right now.”
Many of the office market’s challenges are new and have arisen since the start of the pandemic. While remote work certainly existed before the pandemic, it’s now mainstream. It can be a cheaper option for companies, and it also allows them to recruit from wider talent pools, meaning they’re likely to continue using it as a competitive advantage.
Huge cuts in the tech industry after more than a decade of rapid growth mean that the sector is no longer the largest lessor of office space. Companies like Meta, Lyft, and Salesforce, which once helped drive up prices with their huge real estate needs, have put millions of feet of office space back on the market, sending shockwaves through the real estate industry.
And after a decade of low interest rates, the Fed’s decision to raise them to combat inflation has hurt commercial real estate, which relies on cheap loans to grow. The current economy and ongoing fears of recession aren’t doing the office market any favors, since firms typically downsize their office space in such environments.
Still, other office challenges started long ago.
For decades, the US has been moving away from a straightforward industrial economy where it made products in factories, to an economy powered by services whose real estate needs fluctuate more, according to Dror Poleg, an economic historian. Poleg’s 2019 book, Rethinking Real Estate, details how tech has impacted the world’s largest asset class.
He gave the example of Procter & Gamble, whose business and outcomes used to be more clear. You need certain ingredients and a certain number of workers to make a certain amount of soap, that you would then reliably sell by marketing it alongside soap operas on one of the few existing TV channels. Now, even if making soap is still pretty straightforward, there are a lot more options on Amazon or Alibaba and myriad ways to market it. Things get more complicated for tech companies, like Meta, where hoarding tons of talented employees doesn’t mean the company will end up with a new viable product.
“Basically, you don’t know — if you’re going to spend more money or throw more people at a problem — that it will linearly increase the output or even your odds of getting anything,” Poleg explained.
That, in turn, has meant companies are less likely to know what their revenue will be like so they take on shorter office leases, which means less reliable income for office owners. That ultimately contributed to the rise in demand for “flexible” working space, which started long before the pandemic.
Amir Hamja/Bloomberg via Getty Images
Additionally, the push to squeeze more and more people into less office space, a trend called “densification” that’s been happening since the 1990s, appears to be continuing. Many had predicted that the need for social distancing during the pandemic would help counter diminishing needs for office space, but such protocols are now largely off the table as companies embrace hot desks and smaller office footprints to account for hybrid and remote work and pandemic fears wane. Just as in pre-pandemic days, densification means that less office space is needed.
The desire for nicer, dynamic office space also predates the pandemic. Because there’s so much space available, landlords have to try harder to make their spaces more attractive; and companies have the leverage to opt for beautiful buildings in prime areas stocked with lots of amenities, like cafes, gyms, and outdoor spaces rather than just rows upon rows of cubicles.
“Suddenly you’re in the hospitality business,” Poleg said, which requires a lot more work — and uncertainty — than simply maintaining a building. These complications have made office real estate a less reliable asset class than it once was, making it even harder to get investment if you, say, want to make your building more attractive by adding amenities.
None of this is to say that offices will suddenly be a thing of the past. But there will be fewer of them, and people will go to offices less frequently than they did. In time, more office space will go back to banks or, if possible, be converted to other uses like housing, laboratories, or logistics. Developers have already stopped building as much office space. The offices people do go to may be nicer, since tenants have their pick of office stock amid all the open leases. And for others, they just won’t have an office to return to.
Update, June 5, 2 pm ET: This story was originally published on May 15 and has been updated to include more recent news reports and studies about the commercial office market.