But now there’s a new factor in the marketplace.

Many believe an economic slowdown or worse could be on the horizon. A February poll by The Economist/YouGov found that 51% of respondents believe the country is already in a recession, a view which raises the question: Will a downturn reduce remote jobs and encourage a return-to-office revival?

 

What’s a recession?

A “recession” is typically seen as two consecutive quarters with a falling gross domestic product (GPD). There are other measures as well, but generally, recessions are periods when the economy slows, unemployment increases, and households spend with greater care.

Whether, in fact, we will have a recession this year, next year, or at all, is uncertain.

In February, Federal Reserve Chairman Jerome Powell said Fed forecasters expect “continued subdued growth, some softening in the labor market but not a recession — not a recession.”

Not everyone agrees. A group of leading economists, including former Fed Board member Frederick S. Miskin, argue that recession is likely if not inevitable.

“There is no post-1950 precedent,” they wrote in February, “for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession.”

Standing somewhat in the middle, Wells Fargo economists predicted in March that the country will face a “mild recession to begin in the second half of 2023.”

“Unfortunately,” they added, “even mild downturns bring about rising unemployment, decreased job security, and a slowdown in household formation.”

 

The new economic reality

The lack of certainty in our post-pandemic economy means everyone from CEOs to new hires will need to re-think the office marketplace. Caution — and opportunity — are plainly in the wind.

  • Tech workers — employees who often enjoy six-figure salaries, bonuses, free on-site meals, and stock options — are being forced from the workplace in large numbers. According to LayOffs.fyi, there were 161,000 tech layoffs in 2022. According to techcrunch.com there were a little more than 122,000 tech layoffs in just the first two months of 2023.
  • Although the Fed made funding available “to help assure banks have the ability to meet the needs of all their depositors,” the failures of Silicon Valley Bank and Signature Bank bring into question whether commercial real estate (CRE) firms will be able to access their funds in the event of a future bank failure — and whether tenant companies will have funding access to cover payrolls and expenses, including rent to CRE landlords. So far, at least, with the Fed’s creation of its $25 billion Bank Term Funding Program (BTFP), the government has been willing to protect depositors of all sizes to prevent bank runs. This, at least, sets a good precedent for the future.
  • Construction for Amazon’s prestigious H2Q project — buildings that will ultimately employ 25,000 workers in Virginia just a few miles from Capitol Hill — has been paused. The slowdown, said The Washington Post in March, is a “setback for the e-commerce giant that just a few years ago promised Northern Virginia an economic boom and multiple office towers filled with employees.”
  • “We hired for a different economic reality than the one we face today,” said Google and Alphabet CEO Sundar Pichai in January as he announced that 12,000 workers would be laid off.

These marketplace changes mean that as organizations reduce staff size and cut budgets, they can be more selective when looking at the labor market. Some — but not all — will emphasize return-to-office programs. While tech layoffs have received a lot of attention, the reality is that office jobs are actually increasing. Cushman & Wakefield estimated in March that there were “1.9 million more office jobs than there were prior to the pandemic,” meaning that even with downsizing the competition for top talent continues.

 

The flight to quality

It’s no secret that office vacancies increased as a result of the pandemic, but not all offices are alike and some have fared better than others. There is evidence that demand continues for the best buildings in town.

A recent paper published in Social Science Research Network found evidence of a “flight to quality,” particularly in rents.

“Higher quality buildings,” they said, “those that are built more recently and have more amenities (informally called class A+), appear to be faring better. Their rents on newly-signed leases did not fall as much or even went up. This is consistent with the notion that firms need to improve office quality to induce workers to return to the office.”

“The flight to quality is real,” said Colliers in its fourth quarter US Market Snapshot, noting also that top properties have become difficult to acquire.

“These well-performing assets will be the most liquid from a cash flow and building operations standpoint. However, they are not coming to market as owners are opting to hold.”

If it seems strange to think of post-pandemic office properties as “well-performing,” consider a recent Cushman & Wakefield report regarding commercial property demand in the Big Apple.

“Manhattan is undergoing a surge in new supply,” said the company, “with 22.8 million square feet (MSF) of new and renovated office space scheduled for completion in 2022 and 2023 — 11.9% more than that achieved in the previous five years combined.

“These properties have benefited from the flight-to-quality trend, particularly from tenants with large space requirements, typically already limited with options. More than 50% of space set for delivery in 2022 and 2023 has been pre-leased, with nearly 3.3 MSF pre-leased in 2022.”

Here’s one more: In a 2022 survey, the Gensler Research Institute said “we’re seeing companies flee older Class B and C buildings for high-quality Class A offices that are in great locations, and we’re noticing an increase in demand for hospitality-like amenities in and around these buildings — all in an effort to make the office feel like a destination rather than an obligation.”

 

The New Thinking

Leasing the best spaces in town has always been a way to lure top employees. But in recent years more and more attention has been given to the silent factors that motivate individuals, concerns about health and outlook.

According to Giovanni “Gio” Cordoves, Western Regional President for KBS, there has been “a consistent pattern of companies discovering that bringing teams together in easily commutable and well-amenitized office space promotes collaboration and company culture that translates into business success. This realization is driving long-term office occupancy in markets nationwide by firms who are focused on being at the top of their game.”

Cordoves told GlobeSt.com in September 2022 that “we foresee that firms will continue to move toward a higher prioritization of the health and wellbeing of their employees, seeking office space that offer high-quality amenities such as sanitized indoor air, contactless building features, outdoor patios, and on-site fitness centers — workplace features that make the office an exciting and enjoyable place for businesses of all sectors.”

A 2022 study by Microsoft found that “people come in for each other to recapture what they miss: the social connection of being with other people. In other words: rebuilding social capital can be a powerful lever for bringing people back to the office.”

“Connecting with colleagues is a key motivation for working in person,” according to Microsoft. “Eighty-four percent of employees would be motivated by the promise of socializing with co-workers, while 85% would be motivated by rebuilding team bonds. Employees also report that they would go to the office more frequently if they knew their direct team members would be there (73%) or if their work friends were there (74%).”

Tracy Brower, a Ph.D. sociologist and frequent Forbes and Fast Company contributor, explained in a January Forbes column that “motivation about coming to the office may hinge on finding your own reasons to go in. Feeling good about your time at work will depend on all the ways it serves you.”

Brower, author of The Secrets to Happiness at Work, suggested in the January piece that there are often good reasons to be in the office, including “reconnecting with colleagues,” having a “clearer boundary between work and home,” and “learning from others and building your networks with colleagues.”

In other words, with changing economics, organizations may gain greater employee loyalty and productivity by showing workers how they benefit by a return to the office.

“Leaders,” according to the Harvard Business Review, “need to intentionally use the office to rebuild social capital: the value workers get from their networks, like getting new ideas and inspiration, being able to ask for help or advice, or finding new career growth opportunities. Social capital isn’t a nice-to-have; it’s crucial so that employees can do their best work and organizations can keep innovating.”

In the end, if there is a recession, it does not mean business and commerce stop. It means instead that those organizations best prepared for a changing economy are likely to remain competitive and successful, including those that emphasize quality office settings, fine-tune return-to-office policies, and bulk-up social capital to attract top talent.

Learn more by visiting KBS.com/Insights.