The Future of Office Space: How the Rise of Remote Work is Changing the Real Estate Landscape

U.S. office: Working through change

One of the enduring effects of the pandemic has been the significant rise in the number of people who work from home. According to the U.S. Census Bureau, 32% of office employees worked primarily from home in 2021, up from 9% in 2019 pre-pandemic. That means approximately 12 million workers who used to go to the office are now mostly staying at home. As a result, about 2 billion sq. ft. of office space is being underutilized.

What happens when space is no longer required? So far, tenants have given back about 243 million sq. ft. and have listed another 90 million sq. ft. or so as available for sublease.¹ The math suggests a lot more office space could soon be relinquished as more firms adopt permanent flexible or hybrid working from home models.

A structural headwind

Working from home is not new, but its popularity has certainly changed, with over a threefold increase between 2019 and 2021. What was a necessity during the pandemic is now a preference for many. As the third edition of McKinsey’s American Opportunity Survey puts it, “Americans are embracing flexible work—and they want more of it.”

The McKinsey report goes on to say: “A remarkable 58% of employed respondents—which, extrapolated from the representative sample, is equivalent to 92 million people from a cross-section of jobs and employment types—report having the option to work from home for all or part of the week. After more than two years of observing remote work and predicting that flexible working would endure after the acute phases of the COVID-19 pandemic, we view these data as a confirmation that there has been a major shift in the working world and in society itself […] In time, the full impact of flexible working will be revealed. Meanwhile, these data give us early insight into how the working world is evolving.”

And as the working world evolves, it will likely require less office space per worker—a reality that tenants, landlords and employees are processing, each in their own way.

What occupiers are saying

CBRE’s Spring 2023 Office Occupier Sentiment Survey suggests that occupiers are firming up their policies around in-office attendance, with 45% of respondents planning for full-time or mostly in-office work, up from 37% in 2022. At the same time, however, 22% expect to operate fully or mostly remotely, up from 15% in 2022. As firms solidify their long-term plans, most are moving away from laissez-faire approaches that leave the decision up to their workers.

Workers may find a more crowded office when they return. More than half of the firms surveyed— and 68% of the companies with more than 10,000 employees—said they planned to reduce their office space, while just 20% reported plans to expand. Moreover, over 75% of firms expect to adopt seat-sharing arrangements that don’t necessarily provide a desk for every worker. Nearly all companies preparing to reduce their office space cited the increase in hybrid work as the reason.

To encourage workers to come into the office, the majority of occupiers surveyed are exploring upgrading their space, focusing on key amenities like proximity to transit, ample parking, on-site food and beverage, and—in acknowledgement that face-to-face interactions are the primary reason to work together in the office—shared meeting spaces.

Repricing on the way

In all, CBRE estimates 700 million sq. ft. of U.S. office space, or 7% of the total inventory, is or will become surplus. Furthermore, according to CoStar, as of the end of 2022, 3,383 properties of 50,000 sq. ft. or more that were at least three years old had availability rates above 50%. These properties represent 8% of all office space and account for 30% of total U.S. availability.

Pockets of resilience

Obviously, not all office space is created equal, which is why we analyze the demand and supply dynamics at a subsector level to find pockets of resilience. For each property, we focus on key drivers, including location, sustainability credentials and modernity. It follows that the investment cases for certain subsectors and assets remain intact and, in some cases, have been enhanced by the work-from-home factor. These pockets exist on three levels:

• Geographic: Different demand and supply drivers are at play across various regions of the U.S. The Sun Belt, for example, is benefiting from migration as people and businesses are lured by lower taxes, lighter regulatory regimes and favorable climates. This trend helped Miami top the chart of those cities recording the strongest asking rent change from 2019 to 2022, at 19.5%, closely followed by West Palm Beach, at 18.8%. Other Sun Belt cities such as Phoenix, Memphis and San Diego, also feature among the top 15.²
• Sectoral: The American Community Survey data shows that more than 90% of healthcare workers and 86% of life sciences professionals primarily commute to work, whether it be to a hospital, a lab or a medical office building. The need for physical proximity to projects and patients has boosted demand for life sciences and medical office space. Demand for space is outstripping supply, resulting in strong fundamentals so that while vacancy rates in life sciences, for example, may tick up, they still remain relatively low.
  
• Asset: Firms committed to in-office work understand that they need to offer employees a compelling reason to make the commute. Modern, responsive office designs encourage collaboration, health and wellness by creating spaces and environments filled with natural light and featuring comfortable meeting areas and abundant amenities—both on-site and in the neighborhood. Location may matter more than ever as well, as workers seek to minimize commutes.

Summary

Real estate assets have always adapted to change—some are demolished or converted to alternate uses and others are reconfigured in response to changing market needs. Retail faced a similar structural shift to the one facing office today. Online shopping changed consumer habits, impacting foot traffic at stores and shopping malls. In response, retailers rethought business models and in-store offerings and asset owners reconfigured assets. Retail adapted and, arguably, has emerged stronger and more closely aligned to future consumers. The adaptation process, however, takes time.

Office may be early in the process, but pockets of resilience exist for assets in desirable markets or locations, that serve subsectors less affected by home working, or provide amenities and other features valued by occupiers. Future papers in this series will dig deeper into the medical office and life sciences subsectors, which are well-placed to capture market demand and meet target return thresholds.

¹Source: CoStar
²Source: CoStar
American Community Survey (2021)