Prepared by: Rosen Consulting Group
Presented by: Bridge Bank
Entering the third year of the COVID-19 pandemic, many employers have yet to fully reopen offices or mandate employees return to the workplace full-time. In some cities, the majority of office workers continue to work from home for at least a portion of the workweek. Fewer employees in the workplace continues to contribute to heightened risk in the office market, yet as the world continues to adapt to living with the COVID-19 virus, employers and employees will adapt to new ways of working that will still necessitate physical office space.
The recent surge in COVID-19 infections driven by the omicron variant has paused some return to work plans. Some companies postponed workplace mandates of their own accord. Others encountered resistance from employees and, given current labor shortages, made the prudent choice to delay requiring workers to return to the office. Even as future surges in cases may cause some offices to close temporarily, the trend towards returning to the workplace will continue to gain steam. For many, the full reopening of schools and daycare allowed parents to return to their workplace. For others, vaccines and therapeutics have allowed workers to become more comfortable in returning to the office.
Despite this, by the end of the first quarter, workers had yet to fully return to the office in any major metropolitan area. Physical occupancy levels of office buildings generally remained lower in coastal gateway cities than in the Sunbelt and Midwest. In particular, the Bay Area featured the lowest share of workers returning to the office. Less than one-third of workers compared with the beginning of 2020 worked from their office on an average weekday during the first quarter. The combination of major employers delaying return to office plans and the large share of jobs that can be performed remotely kept physical occupancy levels lower than the rest of the country. The concentration of tech-related jobs that are conducive to remote work has kept physical occupancy low throughout the pandemic.
Comparatively, the share of workers in the office in Manhattan accelerated in recent months to outpace the Bay Area. Though many tech industry workers in New York City continue to work from home, traditional finance, insurance and real estate industries returned to the office in greater numbers. In much of the Sun Belt, employers have fully reopened offices while allowing for some worker flexibility. In the large office markets in Texas, physical occupancy rose to greater than 50% in the second half of last year.
The surge in housing costs in suburban and rural areas have made the decision to work remotely more difficult for some households. With limited housing options in previously affordable cities, many workers are electing to remain in urban areas such as the Bay Area and Southern California. As these workers remain in proximity to their workplaces, the likelihood that they will commute to the office at least part-time is high, supporting the need for office space in urban environments.
The remote work and hybrid options will impact the office market for years to come as tenants adapt to new ways of utilizing space as leases expire. Tenants will continue to reconfigure offices, designing space to entice employees to return and collaborate while promoting flexibility. In recent quarters, a growing number of office tenants signed long-term leases in order to lock in favorable rents as well as provide workplaces that reflect post-pandemic employee preferences. Roughly one-third of office leases signed in the second half of 2021 were for ten or more years in length. Configuring offices for less density will maintain overall square footage for many tenants, though office market demand is expected to soften as some companies embrace 100% work-from-home models. Daytime populations in city centers may remain lower than historical averages for the longer term even as workers return to their offices. In the Bay Area, the share of employees in the office should return to nearly 50% towards the end of the year, barring another surge in infections. At this level, tenants may reduce square footage slightly but will need to maintain much of their pre-pandemic office footprint.
Workforce agility will remain a key factor. The office environment of the next decade will look different as employers and employees adapt to new work styles and technologies. Flexibility in work location and office setup will remain vital to retaining skilled workers. More and more, employees are pushing back against rising transportation costs and time spent commuting. Though the high cost of gas may be temporary, many employees became accustomed to utilizing commuting time to complete work or attend to household duties. Work hour flexibility to enable employees to care for children, attend school or extracurricular activities, or schedule household repairs, for example, are important lessons learned during the pandemic. Even as many factors justify working remotely, most employers and employees recognize the value of in-person interaction to promote corporate culture and foster collaboration.
Evolution of office utilization will take several years as employers and employees continue to test and determine a style of working that works best for each company. For many firms, hybrid models may prove to be most effective and, even as employees work remotely, the need for office space will not be eliminated.
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