Buildings that line a city’s skyline can be viewed as a measure of economic power. Yet offices, an important cornerstone of any city, have been making headlines as a sign of economic weakness due to vacancies brought on by post-pandemic work-from-home (WFH) policies. It is one of the primary factors that contributes to the Urban Doom Loop, a situation where downtown commercial centers experience devalued commercial real estate holdings that stem from low office vacancy — the result being lower foot traffic for nearby businesses and lower tax revenue. All in all, it’s a recipe that has a detrimental impact on local economies.

Stijn Van Nieuwerburgh, a professor of real estate at Columbia University who’s known as “the prophet of urban doom,” recently explained that “there’s a lot of office tenants that have not had to make an active space decision yet. ‘Do I want to renew this space? Do I wanna vacate? Maybe I sign a new lease for half as much space.’ This is what tenants have been doing for the last three years. So, when you take all of those current and future declines of cash flows into account, we end up with about a 40% reduction in the value of these offices.”

The Return-To-Office (RTO) Movement

WFH is responsible for much of the decline in office usage seen over the past few years. Now, four years after the pandemic began, this trend is both larger than before 2020, but less than pandemic highs.

There are several reasons why WFH levels will likely continue to decline, bolstering the RTO Movement.

  • First, many companies that once said employees could work from home indefinity have reconsidered and instituted RTO mandates. Consider Zoom, one of the major beneficiaries of the WFH movement and remote meetings in general. Ninety-eight percent of its employees worked from home in early 2022, but in 2023 it announced a new policy that requires many employees to work at the office at least two days a week.
  • Second, while stricter RTO requirements are becoming more common, they’re still more relaxed than they used to be with employees only in the office for two, three, or four days rather than a full five days. Kastle data confirms that the majority of tenants are back to the office regularly during the middle of the week.
  • Third, an August 2023 study of 1,000 companies conducted by found that 72% believe revenue is higher as a result of RTO and 90% expect to use traditional office space.
  • Fourth, many firms are using work location when computing salaries. ZipRecruiter showed that as of mid-March, job postings included substantial wage differences depending on work status. While the typical in-person salary offer was $82,037, proposed wages fell to $75,327 for remote workers and $59,992 for those with hybrid schedules. According to ZipRecruiter’s Chief Economist, Julia Pollak, “On average, job switchers moving from remote roles to in-person roles received pay increases almost twice as high as those moving in the opposite direction.”
  • Fifth, it might seem that reduced WFH levels would also mean more office demand (fully remote employment was only 15.2% in 2022), but most job listings as of March 2024 were for in-person and hybrid positions while only about 12% were for fully remote employment.

Signs of Economic Recovery

According to the Mortgage Bankers Association (MBA), outstanding commercial mortgages total $4.7 trillion and CRE financing worth $929 billion (20%) will mature in 2024, up from $728 billion in 2023. The catch is that not all of these loans are related to office financing. Office loans worth $206 billion will mature in 2024, but only $102 billion in office financing is scheduled to end in 2025, said MBA.

JLL notes that there’s been an “improvement in the macroeconomic landscape and considerable momentum in RTO in 2023 is leading to consistent growth in office demand over the course of the year. Active tenant requirements increased for the third consecutive quarter, growing 6.6% in Q4 and 20.4% year-over-year (YoY) as companies gradually begin to return to more normal office transactions activity.”

“We expect leasing to grow modestly in 2024,” said Emma Giamartino, the Chief Financial Officer with CBRE Group. Speaking in February, she said, “We are cautiously optimistic that the worst is over for office leasing, particularly for Class A properties, where we generate approximately two-thirds of leasing revenue. Leading indicators from our data partner VTS indicate U.S. office demand has been gradually turning up over the last six months.”

The office marketplace doesn’t exist in a vacuum. While inflation continues to be a nagging problem, the reality is that the economy is enormously strong with little unemployment, a strong stock market, and to this point at least there has been no recession. Such conditions are good for business in general and for the office sector in particular.

What we see today can also be good for investors seeking to acquire properties that could be attractive at discounted prices. As The Wall Street Journal said last year, “firms are raising new funds to acquire office buildings, apartments and other troubled commercial real estate, looking to scoop up properties at a fraction of the price investors paid a few years ago.”

“Opportunities are emerging due to mismatches between property prices and potential long-term value, as well as the evolution of technology, demographics, and sustainability megatrends,” said Goldman Sachs in October. “We think assets at this intersection stand to benefit, while those that are not will likely have a less positive fate. Not all property is created equal, and we think a one-size-fits-all investment approach loses sight of important nuances.”

“We are in the midst of a transition period,” said Cushman & Wakefield, “but a new norm will emerge. As it does, continued job growth will ultimately drive demand for office space higher.”

It points out that “This transition period will be painful as it will result in a portion of the office stock being rendered competitively obsolete. But this portion is limited in size; we estimate that about 330 million square feet (msf), less than 6% of the 5.6 billion square feet (sf), is now obsolete.”

In other words, there are portions of the office sector that are distressed, there are building keys that will be mailed back to lenders, and yet there are also individual markets and properties that are attractive today and will be appealing tomorrow.

“It’s true that the office sector is experiencing a post-Covid inflection point,” said KBS CEO Marc DeLuca writes in Forbes. He added however, that a “flight to quality” to Class A and well-amenitized, upgraded Class B-plus office buildings are what today’s firms need to succeed in a competitive business environment and attract workers.

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