The return to office (RTO) debate has become a tug-of-war between employees and leadership. Some companies’ leadership have mandated RTO — while others have been more lenient, sometimes giving up old offices in favor of remote setups or scheduled offsite meetings.
Whether companies require 100% RTO, opt for a hybrid approach, or embrace an entirely virtual approach carries broad implications for the commercial real estate sector.
RTO Slowdown
Current office occupancy has plateaued since hitting a post-pandemic high in February 2023. According to Scoop Technologies, a software firm that monitors workplace strategies, 58% of the 4,500 companies surveyed have adopted a hybrid approach. The office landscape shows a 7% decrease — from 49% to 42% between February and May 20203 — in companies requiring employees to be in the office full-time. The average number of days hybrid employees work in the office? 2.5.
Employee pushback against RTO continues, especially in some of the country’s larger companies. For example, Apple employees have publicly resisted the company’s efforts to mandate RTO. However, other companies, including Amazon, Alphabet, and Meta, continue to push employees into the office five days per week — and JPMorgan Chase has also mandated its directors to return to the office.
Technology firms are among the most flexible in embracing hybrid environments. And after an initial push to bring all employees back into the office, financial services companies have recalibrated to accept hybrid as more of the norm. For example, 20% of these financial services companies want their employees in the office five days per week — a 2% decline from just three months ago. JPMorgan Chase expects its managing directors in the office every day, but the rest of the company is hybrid.
But this RTO slowdown has far-reaching effects on the companies and the cities in which these offices are based.
Is Hybrid Here to Stay?
Employees have made it clear that they want a say in how they work. A recent Gartner, Inc. survey of nearly 5,000 US, UK, India, and China employees found that over three-quarters (77%) want to help develop hybrid work plans at their companies.
The survey identified motivations for people to return to their offices. Forty percent of those polled said they valued “face-time” with colleagues, leadership, and managers as their primary motivator. Nearly 50% of respondents named workplace amenities, including office equipment (ergonomic chairs and desks, monitors, and wifi), parking, dedicated fitness areas, on-site childcare, and free lunch and/or snacks their number one motivator. Only 10% listed consequences — expectations from their managers or concerns that remote or hybrid work would negatively impact their careers — as their motivation for RTO.
HR Brew also polled its readers to determine how many companies plan to construct hybrid plans based on employee feedback. Of those who responded, 42% said they “sometimes” request employee input, 28% said they allow employees to “heavily influence” decisions, and the remaining 30% said leadership alone develops and implements hybrid policies.
A recent survey from the Conference Board found that job satisfaction among US workers is at a 36-year high. Many employees attribute that satisfaction to having a better work-life balance. Remote and hybrid work has enabled people to spend time previously used for commuting, such as pursuing hobbies and spending time with friends and family. More flexible schedules have enabled some employees to work around going to the gym or doctor’s appointments.
The Impact on the CRE Office Sector
Cities dependent on bustling full offices are growing frustrated and worried as real estate values continue to decline. WFH Research, a think tank tracking workplace arrangements, predicts every New York employee working from home costs the city’s businesses about $4,600 in sales YOY.
The value of former office buildings has plummeted across the country. Tech giants In San Francisco struggled to find sublessees for office space late last year, and a 22-story building, once worth $300 million, has been devalued by 80%, according to the Wall Street Journal. A Parsippany, NJ office building sold for $14.3 million — a $37.7 million loss over the initial $52 million purchase price in 2008.
It’s a similar story in New York, with corporate landlords facing an exodus of office tenants and rising interest rates, according to the New York Times. Higher interest rates haven’t helped, either — hammering the sector and complicating landlords’ abilities to refinance properties or fund building amenities and improvements prospective tenants expect.
Yet this discount pricing is also tempting for many buyers. Discounted deals offer unique opportunities to adapt office space for other uses. One possibility is converting buildings into housing — but that approach carries its challenges.
How cities will deal with the fiscal impact remains to be seen. Some may revisit their fundamental tax structures if more office buildings are vacant or only partially tenanted. CRE is taxed, on average, at a rate of 1.6 times those of homesteads — so every square foot of CRE is worth 1.6 times more than a square foot of owner-occupied housing.
Suppose the days of the central business district are truly numbered. In that case, we may see cities pivot to a mixed-use approach, where properties include housing and other amenities like retail, entertainment, restaurants, public spaces, healthcare centers, and schools.
The Future of the Office
The future of work remains uncertain, but it is clear that the RTO tug-of-war is not over. Employees are demanding a say in how they work, and companies are facing a reckoning as they try to balance their employees’ needs with the demands of their business.
And thus, the future of the office also remains cloudy, especially for CRE professionals.
Businesses continue to optimize and downsize their office footprints. And tenant needs are evolving as they seek more flexible, collaborative workspaces. The pressure is also increasing for CRE owners to invest in renovations and upgrades that attract and retain tenants.
Demand for space is declining even as the CRE market is growing more competitive as investors look to capitalize on the growing demand for alternative asset classes — a trend that’s putting downward pressure on prices and making it hard for CRE owners to generate a strong ROI.
Remote work changed millions of lives. Companies offering flexibility will more likely attract and retain employees — and the CRE office sector will also need to adjust to meet market requirements, whether repurposing office buildings for other uses like residential spaces or even casinos. According to several large institutions, a new challenge is looming: $1.5 trillion in commercial loans that will come due in 2025. Wall Street investors are concerned — but that’s a topic for another day.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
