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Commercial landlords face huge challenges in the work from home era as they confront the reality that empty desks and vacant office towers are here to stay.
In early 2020, only a few academics who had studied remote work for years suspected working from home would persist past the emergency phase of the pandemic. Almost three years in, over a quarter of U.S. employees are still logging in from their home offices most of the time, with that number expected to rise in the coming years.
The result: As much as 330 million square feet of U.S. office space could become vacant and unused by 2030 due to remote and hybrid work, according to a report released Wednesday by global real estate firm Cushman & Wakefield. When added to another 740 million square feet of space that will become vacant from “natural” causes, the total is around 1 billion square feet of unused office space building up over the next seven years.
In 2019, before the pandemic set fire to the commercial real estate market, the national office vacancy rate was around 12%. But by 2030, vacancy rates will soar 55% to around 18%, according to Cushman & Wakefield’s report.
The consequences on the commercial real estate industry of such a bust would be huge, as office tower building managers and landlords struggle to make up for the lost revenue, and city governments lose out on taxes from commercial properties.
“The relationship between job growth and office demand has fractured,” Kevin Thorpe, chief economist and head of global research at Cushman & Wakefield, said in a statement.
Empty offices
The fight between employers and employees over where to work is still raging, but hybrid work seems to be gaining an edge. That’s good news for workers who want to maintain some of their flexible schedules they enjoyed during the pandemic, but not so much for employers who invested big money in new office spaces in the past few years.
Many companies, especially in the tech sector, went on hiring sprees in late 2020 and 2021, and some ramped up investments in new office spaces in a bet that their newly bolstered workforces would return in-person soon. Companies including Google, Amazon, and Facebook-parent Meta swept up empty office buildings, first in Manhattan and then across the country, driven by a sense that offices would continue to be a key component of work. Tech companies were some of the first to widely adopt remote work, but some like Apple and Microsoft were also among the first to mandate employees return to the office.
Employees’ insistence on staying remote at least part of the time, as well as increasingly cloudy economic conditions for tech companies, forced the sector to reevaluate last year, and many firms were forced into offloading much of their newly acquired floorspace. Companies including Salesforce and Meta were among the many that announced plans in recent months to unload offices worldwide in addition to cutting thousands of jobs.
Tech companies cutting back on their offices may herald a much wider drawdown in urban spaces designated for business over the coming years, and other sectors should start accepting that reality now, according to Cushman & Wakefield’s report.
“Obsolescence is kind of the word of the day right now,” Andrew McDonald, Cushman’s president, told the FT Wednesday about the report’s findings, adding that the research should represent “an inflection point, perhaps” for how companies start viewing office space from here on out.
Coping with change
Early evidence of remote work’s impact on urban office neighborhoods, and the businesses that once served office workers, may have already emerged during the pandemic. In several studies last year, economists warned of a “doughnut effect,” or the migration of workers from city cores to suburban areas that is forcing many retail businesses and restaurants to relocate further from the city too.
Landlords and building managers have already had to adapt in New York City and Los Angeles, where empty office buildings have been converted into apartments and condos. City governments have voiced their concern over the potential loss of tax revenue from commercial real estate, as NYC’s comptroller warned in its budget forecast last August that empty offices were an “area of concern” as the city’s office vacancy rates hovered around 20%.
But Cushman’s report said that readjusting to the new normal is possible for owners of urban real estate if they are open to switching to the residential market, and invest more in amenities and buildings as sites for community events. Offices that survive will be those with owners who know how to incorporate “modern-era tenant preferences,” according to the report, including sustainability features and high-quality amenities.
“The office sector is facing a critical chapter of necessary adaptation, evolution, and recalibration,” Abby Corbett, global head of investor insights at Cushman, said in a statement. “Facing this recognition head-on and with a proactive, creative, and strategic approach will help both existing ownership and the prospective investment community ensure the viability of millions of square feet of commercial real estate space.”
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