An estimated 10% of workers are expected to work from home long-term even after the coronavirus pandemic, compared to only 5% before the pandemic. The shift to remote work is expected to have long-lasting impacts on office usage, but experts say there’s still hope.
Economic and population growth in the next five years are forecasted to expand the office market in the U.S. and make up for pandemic-related losses by 2025, according to analysts at Cushman & Wakefield, a Chicago-based commercial real estate services company.
“Expect the office market to make a full recovery despite these headwinds. And that’s really the result of our analysis, not something we just engineered,” said Rebecca Rockey, Cushman & Wakefield’s global head of forecasting and co-author of the study.
At the end of August, office use was still down 51% compared to the end of February, according to Brivo, a Maryland-based cloud access control company and office analytics provider. As the economy reopens, employees are expected to trickle back into offices, but office demand is expected to remain 15.8% lower than it would otherwise be from 2022-2030, according to Cushman & Wakefield.
“You will see companies re-thinking how much space they have to provide for their employees. You will see different patterns where instead of five days a week being the normal pattern, maybe two days a week will be more the norm, or one day a week,” Brivo CTO Jeff Nielsen told Yahoo Finance.
But the office market will return to pre-crisis vacancy levels of 11% by 2025. Vacancy rates will rise till 2021 and peak in the second quarter of 2022, according to Cushman & Wakefield.
“Over the long-term, companies that are increasing their work-from-home force will have only slightly lower office space needs than before. The reason for that recovery is that there will be more and more office jobs,” said Rockey.
Tailwinds combatting pandemic-related office losses
The U.S. lost 1.7 million office jobs in 2020, according to the report, but most of those job losses aren’t permanent since office jobs were among the least economically impacted by the recession.
Plus, the U.S. economy is shifting away from manufacturing to white-collar jobs. Office-using jobs are at 13% right now and are projected to reach 24% in the next decade, according to Cushman & Wakefield. Health care, social services, computer-related jobs and math-related occupations are the fastest growing jobs in the U.S., according to the BLS — industries that primarily operate out of offices.
The overall pool of workers is also growing. Population growth and economic recovery are expected to boost the overall labor market by 6 million people to 168.8 million in 2029 at a compound annual rate of 0.4% for a total of a 3.7% increase from 2019, according to recent projections by the U.S. Bureau of Labor Statistics (BLS). Even though a higher percentage of office workers will work from home part-time or full-time, an expansion of the labor force will increase the quantity of total workers and help replace some of that percentage loss, according to Cushman & Wakefield’s analysis.
“Office employment is expected to become a significantly larger share of employment because the labor markets are in a more mature state,” said Rockey. “The future of the economy is tied to technology companies — which are major occupiers of office space.”
On top of that, the coronavirus pandemic is expected to reverse a decades-long trend of “densification” in the workplace — or allotting fewer square feet per employee. The study only assumed a halt in densification, though Cushman & Wakefield noted that increasing square footage by 50% per employee would fully offset negative effects of remote work.
It’s actually not unprecedented
Rent prices are predicted to start declining in 2021 and drop 9.3% by the first quarter of 2022 before rebounding in the second quarter of 2021, according to the study. Office rent asking prices typically lag behind economic conditions, which is why the U.S. has not started to see significant dips in office asking prices, said Rockey.
“Landlords are incentivized in any down cycle to maintain occupancy. So they are leveraging strategies to maintain tenants or to compete for new tenants,” said Rockey. “So we will see an increase in concession packages [discounts, fee waivers, etc.].”
But this isn’t the worst the U.S. has seen — even in the past two decades. Rent prices fell 17.8% after the dot-com bubble burst. The current drop in rent prices is only slightly worse than in the Great Recession, when rent fell 8.6%. Vacancies are expected to reach 17.6% by mid-2022, matching vacancy rates after the dot com bust in 2003 and just outpacing the 17.4% vacancy rate in 2010 following the Great Recession, according to the report.
“This recession is different in many ways. That’s really important,” said Rockey.
But the extent of the recovery hinges on two factors, said Rockey: the timing of a coronavirus vaccine and whether businesses receive a fiscal stimulus from Congress. Under the worst conditions the office market wouldn’t recover until the start of 2028, but on the upside, the office market could recover in the first half of 2024, according to the report.
“With a vaccine, we would have higher levels of business certainty, faster hiring and a faster return to full employment,” said Rockey. And “if Congress ultimately enacts a stimulus package, that could bridge the gap between this Fall and whenever the economy is truly up and running… which would have cascading effects leading to a faster recovery in office employment.”
