The prevalence of remote jobs has contributed to a decline in office real estate—but leaves opportunities for new ventures.
- There is currently 962.5 million square feet of vacant commercial office space in the U.S. and the total vacancy rate in the country 20.2%.
- Asset defaulting has also increased. Los-Angeles-based Brookfield Properties defaulted on $700 million in assets, according to the most recent JLL quarterly Office Outlook report.
- Dallas and Houston are among the most severely affected cities in the country, respectively having 25% and 25.6% empty offices.
- San Francisco tech companies—including Meta Platforms, Airbnb, and Salesforce—are subleasing 3.5 million square feet of office space, The San Francisco Standard reports.
Why It’s News
The U.S. economy is changing. COVID-19 forced the world to evolve in the face of a global pandemic, forcing millions of workers to adapt to new technologies and work from home. This has created a permanent change in the workforce, with 12% of it in the U.S. now fully remote and 28% hybrid. While tech companies continue to push back against the practice, a large percentage of U.S. workers actively prefer the comfort and convenience of working at home—and some experts are saying that remote workers have the immediate advantage to make demands.
Richard Stockton is the Senior Managing Director at Ashford Inc. in Dallas, Texas. He tells Leaders Media that these changes are good for workers and likely a permanent part of the workforce going forward, but it has come at the expense of the real estate industry. It is always possible that the prevalence of cheap real estate could incentivize a massive return-to-office movement to take advantage of low-cost space, but he suspects that the immediate future will be difficult for real estate owners.
“The problem that poses for the office market is that we’re seeing leases rollout, tenants downsizing as much as 30%. That puts downward pressure on rents, cashflow drops, and mortgage interest rates are higher. This his compounded by tenants without leases are subleasing space and affecting rents. Office real estate values have dropped as much as 25% and are 40% to 50% down from prepandemic values,” says Stockton.
Office real estate is not going to fully disintegrate. There are many industries where in-person office work is a necessity of the job. However, companies that can afford to reduce cost while increasing productivity are going to look at remote work as a benefit going forward, particularly for jobs like administration and accounting that can be managed over Zoom.
This is unfortunate news for many real estate owners, who may find themselves with obsolete and undesirable properties for the foreseeable future. Demand will progressively increase in the future with the rising population, but the demand will be for new buildings in the coming decades. As Stockton notes, this is a natural evolution of the market. Investments do not always payoff.
This still leaves real estate owners with a viable alternative—convergence. Investors and real estate owners can partner with private capital and equity partners to convert commercial real estate into residential real estate—tearing down or converting existing structures to meet the demands of the growing demand for affordable housing, hotels, or retail space.
“Investors have to decide, if you own a portfolio of office assets, if you have winners and losers. You may need to cut your losses on buildings that are not going to be long-term attractive. Either let these properties go or embrace convergence. ‘The National’ in Dallas was recently converted into 320 apartments, a 210-room hotel, some office space, and consumer-level retailers including Chick-fil-A and a coffees shop,” says Stockton.