With a large segment of the workforce still working from home, what does this mean for the future of commercial real estate? According to recent data, office vacancy rates are over 16% right now (up from 9% in late 2019) and subleased space is coming back on the market. This has led many analysts to wonder whether companies still need the offices they had before and what will happen to all the vacant office space if companies do not return.
What does the future hold? Will the office building survive COVID-19, or is office space now obsolete?
The Case for Remote Work
Recent trends show that people are moving out of major cities, especially those with a high cost of living. As a New York policymaker explains in an analysis of commercial real estate,
“Many of the workers themselves who left the city to ride out the coronavirus are finding much more space for much less money. The average recent monthly rental in New York City was just above $3,400 a month and the average Manhattan apartment was 733 square feet. Throw in often-terrible commutes and high taxes, and at some point staying in the city becomes much less desirable. That’s true for all big cities, of course, but especially for expensive ones like San Francisco and New York.”
Given the fact that 70% of new office construction is in central metropolitan areas, this relocation poses a real threat to the long-term viability of in-office work.
To further exacerbate matters, the people who have stayed close to their companies’ headquarters are less likely to want to go into the office. In the early days of the pandemic, many people praised the lack of commute as an opportunity to be more productive. But after a year of working from home, many employees and their managers are rejecting this idea now in favor of a more sustainable work-life balance where these “saved” hours are now being used for rest and recreation instead of work. Many professionals are now unwilling to give this time back to their employers and are making remote work a condition of their employment (either with their current employer or prospective employers).
For the most part, employees are happy working from home, and this increased job satisfaction has demonstrated significant business benefits. As Eric Moore explains in an article on why remote accounting is here to stay,
“Employees have communicated they experience less interruptions at a home office than they do while working at a corporate office. Less interruptions can often result in more productivity. Focused and productive employees tend to be happier and more fulfilled in their respective roles, which is likely why companies that offer the option to work remotely have 25% lower turnover than their counterparts.”
It is hard to argue with the premise of keeping employees happy to do their best work. As a result, many organizations have agreed to continue offering remote work even after the pandemic ends, especially in industries and roles where the labor market is highly competitive.
However, business leaders understand that there will always be a need for in-office work, at least to some degree, which is why many are planning to implement a hybrid work model. In this type of arrangement employees are asked to split their time between in-office and remote work based on the needs of their employer and the nature of their work.
The Case for Office Work
Proponents of working in the office argue that there is some work that necessitates being around others – areas where technology cannot replace the need to be physically present with your peers. Larry Littlefield summarizes this sentiment around the importance of in-office work when he says,
“Working from home has succeeded in the short run because workers are doing work they already know how to do, for firms that already exist, producing services that already exist, for customers and clients they already have. They are doing things that are routine. There is little need for new transactions because few businesses are expanding, and little need for training because few workers are being hired. Just a lot of ‘me work’ that could in fact, as it turns out, be done anywhere. In the future businesses may allow experienced employees to do more of that kind of independent work, or perhaps all of it, at home or elsewhere. As for working together and learning new things, however, those suffering from “Zoom fatigue” are finding out that online collaboration is just not as good.”
Even when the work itself does not necessarily require being side by side, some employee demographics may have unique needs that can be better met in an in-office setting. For example, employees that are earlier in their careers tend to be more eager to return to the office because it is better for skills development, learning opportunities, and career advancement, not to mention socialization. Similarly, new hires tend to echo this need, desiring physical access to their peers and management to get more plugged into their employers and the work they were hired to do.
IT teams also champion the need for in-office work because they understand the kinds of security risks and headaches that come with trying to manage users with different technological needs across different locations. Allowing employees to use their personal devices and networks for company work creates a huge cyber security risk, which is something that IT departments have been scrambling to keep up with for over a year now. It is also far more difficult to protect company property and proprietary information with workers off-site (and the recourse of termination when these are compromised typically does not make up for the kind of damage that can be done if something falls into the wrong hands). As result, companies are now erring on the side of bringing employees into the office to do confidential and sensitive work on their secured private networks to protect themselves against malicious attacks or data breaches. Furthermore, when employees experience technical difficulties or problems, service desk support gets far more difficult with employees working from home because workers may have different ISPs, software settings, bandwidth, and personal office equipment. Between cyber security risks, asset protection challenges, and limitless technical barriers, it is no wonder that IT teams across every industry are often spearheading the initiative to bring employees back into the office.
Lastly, management understands the value of creating a culture of accountability by bringing employees to the office. Being in the office offers more control over employees’ behavior when they are on the clock. The hard truth is that preventing employee misuse of time is more difficult with a remote workforce. Throughout the pandemic, studies have shown that while employees self-report being better focused and more productive, the percentage of employees doing non-work-related activities like shopping online, checking social media, and running errands has also increased significantly. On the other end of the spectrum, some workers have found the blending of their personal and professional lives has resulted in longer hours than before, perpetuating the kind of overwork that leads to burnout. Bringing employees back into the office ensures both groups are working as much as they should instead of either underworking or overworking, both of which can cost the company dearly in terms of either lost time or turnover in key positions.
The Future of Office Space: Predictions
Some data suggests that employees want to stay remote, while other research indicates just the opposite. So, what will the future hold?
In the coming months the decision about what retuning looks like will be highly individualized. Each company will have to decide if their future is in the office, at home, or something in between. But what can be said for certain is that office space is not dead! Who occupies that office space may change and offices themselves will certainly look different than before, but office buildings will not become obsolete in the years to come.
With more companies looking to renegotiate their leases or backing out of them altogether, landlords will likely be forced to offer shorter and more flexible leases. Building operators will be under pressure to make their buildings more attractive to new lease agreements by staying on top of critical building operations activities, as well as enhancing existing offerings with attractive new features like touchless entry. These changes are beneficial for companies looking to return to the office as well as those looking to have dedicated office space for the first time, leveling the playing field for small companies and startups.
Additionally, it is possible that “office localization” could occur. Companies may begin renting cubicles or partial office space in numerous locations for employees concentrated in various areas to bring them together for collaborative work without requiring that everyone come back to the main office.
As you navigate what the future of your work looks like at your company, lean on a trusted financial leader to help your organization make sound financial decisions. Our fractional CFO services and executive search practice can help you find the right kind of leadership to fit your specific needs.