The Office Real Estate Market is Down, But a Revival is Coming

According to Commercial Edge, U.S.  office vacancy rates stood at 16.2% in December 2022, a 1.1% increase from 2021, while national listings rates fell to $38.06, down 3.1%. In the last few years, the once-thriving segment has lost momentum due to evident market circumstances. Most recently, sliding revenues and looming economic uncertainty caused leading technology corporations to  exacerbate the market’s downturn by shredding significant inventory.

Unfortunately, researchers don’t expect a reversal anytime soon. A recent Columbia and New York University study anticipated the asset class to  lose $454 billion in property value over the next few years.

That said, there are indicators that the office market might start to recover  as soon as this year. But developers interested in launching successful projects in the segment need to understand how profoundly it’s changed in recent years. And where the biggest opportunities lie in the contemporary landscape.

Here’s a look at the trends shaping the office real estate market in 2023, starting with the impact of big tech’s recent slowdown.

Tech Sector Layoffs Are Driving Office Vacancies and Creating Opportunities

After  plummeting to 15% in April 2020, U.S. office building occupancy rates gradually began to climb as the world adjusted to the impact of COVID-19. By September 2022, employers brought enough of their workforce back onsite to push the national occupancy rate to 49%. However, the segment’s recovery hit a major roadblock in the form of massive layoffs in the technology sector.

The New York Times reported that Meta, Twitter, Chime, GoPuff, and Salesforce  laid off over 100,000 workers in 2022. Market experts viewed the industry’s headcount reductions as a correction of the sector’s unsustainable growth. During the pandemic's peak, the public embraced digital services to adjust to life under quarantine, inflating the sector’s revenue. Many leading tech firms went on hiring and leasing sprees to compensate for a wave of demand created by COVID-19.

But after the lockdowns ended, the economy became unstable, prompting a sharp decline in consumer spending. Big Tech responded to the shift by aggressively cutting overhead costs and consolidating and subleasing their properties. The sector’s contraction greatly impacted the commercial real estate market,  reducing its share of office leases from 21% in 2021 to 16% last year.

With a recession looming, the tech industry isn’t going to meaningfully expand again anytime soon. In fact, Amazon plans to cut  10,000 team members, and Google is allegedly  considering mass layoffs, which would increase office vacancies across the country. As the sector is still right-sizing its office inventory, it won’t be the major activity driver it was a few years ago. In 2023, developers may want to consider bringing firms from industries into buildings previously occupied by tech companies. 

Goldman Sachs and J.P. Morgan Chase have advocated bringing their employees back to their New York City offices. They view in-person collaboration as fundamental to their past and future success and expanding their presence in major metropolitan areas. Because of Goldman and Chase’s size and influence, the broader financial services sector will follow their lead. 

Although banking companies alone can’t fill the tech sector’s hole in the marketplace, their measured expansion offers good outcomes for developers. Since Big Tech is eager to offload office inventory, real estate professionals can make especially profitable deals.

Plus, the minor renovations required to bring a financial services company into a former tech space are  less expensive and risky than attempting an office-to-multifamily conversion.

Hybrid Offices Are Tomorrow’s Ideal Workplaces

Although the paradigm shift away from in-person work came about because of social distancing mandates, many people enjoy operating offsite. Pew Research reports 78% of U.S. staffers want to  work from home permanently because it offers an improved work-life balance. However, an estimated 80 million Americans working fully or partially at home are open to  returning to the office under certain conditions.

McKinsey’s findings come from its annual American Opportunity Survey, which gathers data from 25,000 U.S. residents. The 2022 report showed most employees (32%) want to do their jobs at home, and over a quarter (26%) want to operate remotely at least three days a week. The survey participants also named “flexible work arrangements” the third-biggest motivator for seeking a new job. That said, a significant number of staffers (31%) said they’d agree to spend most of their work week at the office.

The key takeaway for employers is that remote work-loving employees will start commuting again if they don’t have to be onsite full-time. And the takeaway for real estate development firms should be  hybrid office renovations are a huge opportunity in the segment.

As opposed to traditional workplaces, hybrid offices serve onsite and flexible staffers. Desks, workstations, and conference tables allow employees to work, learn, and collaborate on-site. They also feature open floor plans, reconfigurable furniture, group video conferencing spaces, and reservation systems for private work areas.

The main benefit of hybrid offices is promoting socialization and unstructured collaboration. Because of those attributes, they can help staffers feel connected to their colleagues and companies. In addition to fostering worker satisfaction and retention, they cultivate innovative thinking that gives companies a market edge.

The secondary benefit offered by hybrid offices is smaller footprints, and therefore costs, than traditional workplaces.

Hybrid offices have become increasingly popular in the post-pandemic era as they appeal to employees and employers. A recent EY survey revealed  42% of companies use a hybrid model. And though 33% of leaders intend to cut their commercial real estate investments this year, 69% are or are planning to hybridize their offices to attract and retain the best workers.

Developers who can meet the need for office building transformations can capitalize on the “new normal.” EY’s data proves strong demand for revamped workplaces exits, which is addressable via forward-thinking renovations and ground-up projects. Although recession anxiety is pushing corporations to cut costs, leaders understand that talented employees and innovation-driven cultures are invaluable.

Young Professionals Support Returning to the Office

In contrast with their older counterparts, younger professionals want to  return to the office, a desire with big implications for the commercial real estate market.

A recent joint university study found less than a quarter of employees in their 20s want to work remotely. Researchers discovered that Generation Z’s preference for the traditional on-site model is practical. Many young professionals lack adequate workspace because they live with their parents or roommates. Because of those conditions, the demographic feels that operating remotely in environments filled with distractions hampers productivity. Moreover, McKinsey noted that 18-to-34-year-olds believe working from home full-time is detrimental to their performance and mental health.

As a consequence, 20-to 24-year-old workers have become the least likely to apply for remote jobs on LinkedIn.

Gen Z’s work preferences are important for employers because the demographic will represent almost  30% of the workforce by 2025. Companies will need to address those desires if they want to recruit tomorrow’s best performers. Firms that don’t act risk missing out on transformational thinkers that drive innovation in every industry.

Businesses can lay the foundations for their futures by maintaining offices with  young employee-friendly features, like art installations and special event spaces.

Developers can take advantage of the generational shift by renovating older offices and launching new buildings to suit the workforce’s changing tastes. But firms should also remember that Gen Z won’t be young forever.

Eventually, the age group will leave the nest, get married, and start families. As young workers become seasoned professionals, their priorities will change, and having the ability to spend more time at home will become more important. Thankfully, hybrid offices allow companies to accommodate multi-generational teams.  

Since market volatility has lowered office property prices, now is the perfect time to set up new projects. Because property values are relatively low and vacancies are up, development firms can strike more financially advantageous deals. And the projects that come out of those deals will be more valuable in a robust economy that allows employers to refocus on expansion. Laying the groundwork for hybrid office projects now makes sense for two reasons. It means seizing opportunities created by ongoing events like the pandemic and long-term inevitabilities like shifting workforce demographics.  

Want to learn more about the opportunities and challenges shaping commercial real estate this year? Download our  2023 Project Managers Survey to learn what project managers feel are the sector’s biggest problems and best potential solutions.