Small Businesses

What is the future of commercial real estate as remote-first work becomes permanent?

  • 5 min Read
  • July 29, 2021

Author

Escalon

Table of Contents

When the COVID-19 pandemic hit last year, corporate America was forced to downsize its real estate footprint as businesses allowed most of their employees to work from home. Then surprisingly, the pandemic showed that a significant amount of the work that typically happens within office walls can be done even when they are closed. In fact, a large percentage of the workforce discovered that they can be more productive working from home while enjoying the freedom of a more flexible schedule. According to a study done by Pew Research Center, more than half of the respondents said, given a choice, they would prefer to keep working from home even after the pandemic ends. 

Remote work isn’t going away. And with the economy opening slowly, companies have been weighing the costs and benefits associated with what to do with unused office spaces as they contemplate whether to return to the office. There are organizations such as Facebook Inc. that are allowing some staff members to work from home permanently, whereas other companies such as Goldman Sachs Group Inc. are asking their employees to come back to the office full time. Then there is a third category of businesses, like Alphabet Inc., that are adopting a hybrid workweek and are looking to have most of their employees to spend at least a few days a week in the office. 

In an effort to make hybrid workspace a success, Google is going out of the way to attract and keep employees at the office. “Instead of rows of desks next to cookie-cutter meeting rooms, Google is designing ‘Team Pods.’ Each pod is a blank canvas: chairs, desks, whiteboards and storage units on casters can be wheeled into various arrangements, and in some cases rearranged in a matter of hours,” as reported by the New York Times.

Similarly, Microsoft is building futuristic conference rooms keeping in mind employees who are not physically present in the office. These meeting rooms will include eye-level, wall-mounted cameras and screens that will allow staff members to maintain eye contact with their remote colleagues.

What about businesses that are making lease payments for large offices even though their offices are mostly empty?

 

As employers and workers adjust to the new normal of working remotely, demand for coworking spaces is gaining momentum as people look forward to holding meetings without any distractions from pets or kids. To make the most of the situation, there are businesses (that have gone completely remote) that have converted their office spaces into shared work spaces. 

One such example is Wells Marvin, owner of Old Town La Quinta, who has been leasing executive suites offering private offices that come “pre-wired for CAT 5 Data lines, phone lines and alarm systems and all include the latest in energy efficient equipment for heating and cooling,” as per the website. 

What about companies that are stuck in leases they can’t get out of? Such companies are subleasing their offices and taking a financial hit. For example, San Francisco-based Affirm, which became remote-first when COVID-19 hit, decided to sublease one of its two offices in San Francisco to recover some of its rent, as it does not expect all of its employees to come back. The company booked impairment charges to the tune of roughly $11 million during the quarter that ended March 31 for subleasing the office, which it has rented until 2026 — companies book impairment charges when they sublease office space for less money than what they pay for it. 

Just like Affirm, Yelp has signed sublease agreements for some of its office space in San Francisco and New York. The company plans to book impairment charges of $11 million in the second quarter in connection with the contract. 

What does this mean for commercial real estate long-term? 

In the second year of the coronavirus pandemic, demand for office space has dropped significantly. According to CBRE’s Remote Working: The Potential Impact on Office Demand report, with remote working expected to become more widespread and lasting, office demand could decline. On the other hand, the need for social distancing and other safety measures in the COVID-19 era could cause more demand for office space in order to reduce workplace density. (CBRE’s base scenario assumes a 15% increase in working remotely and a 15% increase in office space per worker due to social distancing, leading to only a 2% decrease in overall office demand.) 

The bottom line is, as a result of COVID-19, there is still a lot of uncertainty when it comes to the commercial real estate market. With fewer people working from offices still, businesses now may choose to rethink the amount of space they lease for their employees. That said, whether people are working from the office, their homes or a mix of both, office spaces will continue to exist. Because it is in such spaces that employees can brainstorm, bounce ideas around and work alongside their peers. 

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