Estimating Future Demand for Office Space

In this multi-part series, external contributor Tal Peri explores the adoption of remote work before and after the pandemic and addresses two main questions for office investors and tenants: How widely will the flexible work model be adopted after the pandemic subsides and how significant will the impact be on office demand? In this first article, Peri summarizes the main topics to be addressed in the series that include the adoption of remote work before and after the pandemic, the ways in which work from home are impacting demand for office space, and other forces that may offset the erosion of office demand.

The COVID-19 pandemic has forced companies around the world to engage in the largest global work-from-home (WFH) effort in modern history. While productivity has been generally better than anticipated, remote work — which in the early months of the pandemic was overwhelmingly praised — is emerging as an imperfect substitute for time in the office, and its attributes and detriments are now being assessed in a more balanced way.

A consensus seems to be forming that, in the aggregate, WFH policies will be adopted by more employers going forward. However, the office will remain critical in a hybrid work model. In other words, the vast majority of office-using employers don’t plan to adopt an all-or-nothing approach to WFH, but rather seek some balance between time spent working at home and in the office.

To address these issues, it is prudent to establish a pre-quarantine baseline relating to remote work.

Benchmarking. It is important to recognize that many employees had been working from home in some capacity for a decade or more prior to the pandemic, so the pandemic-induced WFH period did not start from zero days of WFH in March 2020.

Additionally, neither the average, nor the peak, of office utilization was at 100% when the world went into lockdown. Many office desks and workstations were empty because individuals were on business travel or using sick days, vacation days and paid holidays.

Employer and employee factors. A wide range of factors will influence the long-term adoption of remote work after the pandemic.

Employers will have to balance the positive aspects of WFH policies (e.g., potential cost savings, higher employee satisfaction and talent retention) with the negative aspects such as potential loss of productivity and innovation, erosion of company culture and loyalty.

The same applies for employees. They will have to calibrate their desire for better work-life balance, less commute time and a more flexible work schedule, with the potential for less engagement with colleagues and superiors, which could lead to lower performance, fewer opportunities for client generation and fewer promotions.

Post-Pandemic WFH Adoption. A number of studies released over the past year provide insight into WFH’s potential long-term outlook. For example, a McKinsey study argues that the potential for remote work is determined by tasks and activities, not occupiers. It focused its analysis on identifying tasks that can be performed remotely without loss of productivity. Many other reports written by organizations such as CBRE, JLL, PWC, Colliers, Morgan Stanley, Gensler and others, are based on surveys of employers and employees to identify the pre- and post-pandemic WFH prevalence. These studies reveal differences between employers’ preferences and employees’ desires for remote work.

Additionally, these studies indicate that employee WFH preferences vary significantly by age group, marital and family status, demographic background, commute time and general living conditions (e.g., a large house versus a shared apartment). These surveys are somewhat subjective (by definition they are self-reported) and show how enthusiasm for WFH days declined as the pandemic wore on. While cost-saving measures such as leasing less space may be more appealing to employers during a recession; some medium-term WFH adoption may moderate in the long-term as companies once again begin to spend and invest.

While the impact on office demand will vary between urban and suburban settings, as well as between primary, secondary and tertiary markets, this series will focus on analyzing office demand in the aggregate. When projecting future office demand, it is challenging to separate the WFH dynamic from other forces impacting occupancy in buildings, such as those mentioned below. Despite the difficulties, some prominent studies are aiming to do that.

Historical data. A report from Cushman & Wakefield and The George Washington University determined the office demand decrease that would have occurred from 2017 to 2019 if more employers had implemented WFH policies during that time. By examining historical data first, they eliminated some variables or unknowns that would complicate future office demand projections, such as an increase in office-using jobs as the recession subsides and a decline in office construction.

Active management of remote work policies. The Cushman and GWU report also analyzed the effects of unmanaged remote work policies. It found that some remote work policies are so flexible that employees are not required to plan ahead or be consistent about the number or specific days of the week they will work remotely. This means the chances of two or more coworkers just happening to be in the office on the same day diminishes significantly.

Companies that value the positive aspects of spontaneous face-to-face interactions that lead to innovation, creativity and reinforcement of company culture will therefore have to actively manage employees working in hybrid office arrangements. And the more days all employees are required to be in the office at the same time, the higher the number of days the office will reach peak occupancy. For example, a company requiring all employees to be in the office every Tuesday, may function optimally with a combination of dedicated and shared workspaces, finding that sharing tight quarters one day each week does not materially affect productivity.

However, a company that requires all employees to overlap in the office three days a week may need more dedicated and less shared space, since the inconvenience of working in tight quarters will occur for three business days every week.

Reasons for working in the office. Additionally, other reports such as CBRE’s “Real Estate Strategy Reset” have indicated that with more remote work, the office space will need to be more engaging, enticing and functional to draw employees in. Some suggest that tech-company features such as ping pong tables, e-scooters, social outings for employees and abundant free food options will draw young professionals to the office. However, older members of the workforce, especially those caring for children or aging parents, will need different incentives or even mandates to work in the office.

Many of these studies assume that employees will gather, to varying degrees, for critical collaborative sessions, team projects under deadline, or to use equipment or tools not available at home, resulting in an increase of collaborative workspace and meeting rooms. When the office becomes a destination of purpose as described above, average square footage per employee is expected to increase, further reducing the potential decrease of office demand.

Third Location. The terms WFH and remote work are often used as synonyms. But remote work can also include a “third location” in addition to the main office and home, creating what is called the hub-and-spoke concept. This third place could be another office closer to employee homes — in suburban locations or residential areas close to central business districts. Employees could benefit from significantly lower commute times while enjoying the benefits that an office provides (e.g., physical separation between work and home, quiet working area, proper workstation, IT support, etc.).

These office spaces could consist of direct leases for small blocks of space or day-pass arrangements with co-working providers. This component of the hybrid work model would mostly constitute a geographical office demand shift from one location to another, rather than eliminating all or some of the leased square footage. In aggregate, it could slightly reduce the overall square footage needed by a hybrid office worker, but it also has the potential to slightly increase overall office demand due to an employee that now has access to at least two office-based workstations — one in a “hub” or headquarters location, and another in a “spoke” or non-headquarters location.

These factors illustrate why a decrease in the number of days spent in the headquarters office doesn’t necessarily lead to a corresponding decrease in office demand. In other words, working from home one extra day per week, or 20% of the week, does not lead to a 20% reduction in the amount of office space needed — even without incorporating other factors explored below.

To estimate the effect of the WFH dynamic on office demand, it is important to separate the recessionary impact from the equation. The main question is not limited to what office demand will be during a pandemic-induced recession, but rather what the long-term outlook for office demand will be after the current recession subsides.

More office-using jobs. On the demand side, the economic recovery will eventually increase the number of office-using jobs beyond pre-pandemic levels and the respective employment growth will offset the decline in office demand brought about by WFH arrangements. Additionally, there are strong indicators that office densification trends in the decade leading up to the pandemic went too far. As such, a general de-densification is expected to occur, further counterbalancing the decline in demand. The move toward de-densification could have a greater effect on demand for office space than pandemic-related measures such as social distancing that may turn out to be temporary.

Construction slow-down. On the supply side, elevated vacancy rates and downward pressure on rental rates and rent growth expectations should slow the future construction pipeline and eventually lead to a new equilibrium. Additionally, some of the office stock is expected to be taken off the market due to conversions into other uses such as residential or even hotel. There are many prominent examples, including New York City’s recent initiative to adjust zoning laws to allow for such conversions.

In a recent study conducted by Hines, the company referenced historical datapoints in the Netherlands where WFH-friendly laws were introduced in 2016 that led to an increase of WFH penetration, but the overall effect on office demand was still net positive when taking into account all of the above forces and counter-forces. This scenario will be analyzed in a future article to determine to what extent this case study can serve as a proxy for projecting future office demand fundamentals.

We are currently only at the beginning of the post-pandemic transformation process and it is difficult to predict the exact level of WFH adoption and other trends like migration patterns that were fast-tracked by the pandemic. Only time will tell which patterns will continue for the long term and which ones will slow down or even reverse. For this reason, real estate investors are carefully following news on this topic, especially when larger companies announce their new workplace strategies.

Since companies are not homogenous and will apply different strategies, the signals in these decisions are certainly mixed. There are companies like Salesforce, Spotify, Dropbox and Pinterest that have announced a reduction of their real estate footprint to allow for more remote work or even permanent WFH policies. But overall, the recent and significant leasing activity by strong TAMI (technology, advertising, media and information) tenants — even by some of them who praised the remote work revolution in the early days of the pandemic — still seems to suggest that they are playing the long game on the office sector. They seem to be betting on amenity-rich, state-of-the-art, inviting and engaging office space that fosters creativity, collaboration and innovation that will help them win the war for talent for years to come.

Key Sources Used to Support This Article

• PwC’s U.S. Remote Work Survey
• Cushman & Wakefield: Workplace Ecosystems of the Future
• McKinsey: What's Next for Remote Work
• CBRE: Real Estate Strategy Reset: Eight Core Truths Guiding the Future of Work
• JPMorgan: Remote Work and the Future of Office Space
• Newmark: Office-Using Employment Recovery Supports Office Values and Future Demand for Space
• Brookfield: The Future of the Office: Not What You Might Think
• Hines: Work From Home and What the Dutch Have to Teach Us

This article was edited by Margarita Foster, a senior editor with LoopNet.