Abacus: The Squeeze on Commercial Real Estate
ANDREY DENISYUK
The trajectory of work has been moving further and further away from a traditional office environment for years now. In Silicon Valley, home to some of the nation’s largest corporate compounds, remote work options have somewhat ironically always been a popular alternative. The pandemic, which has served as an accelerant for countless undercurrents that have just now come to the surface, has arguably been most impactful in revolutionizing how we do work. While the traditional office environment certainly has its advantages, the slow return to normalcy has in many ways left that paradigm behind. Reports from countless outlets are quick to note that nearly 80% of full-time workers would prefer to return to the office full time. What used to be a benefit for savvy tech workers in the valley or the high-ranking executives now seems to work for everyone. What is most interesting is that there are benefits for both sides, both employee and employer.
Office space has always been a large liability for businesses whether a startup or a fortune 500 venture. In New York, office space can cost upwards of $14,800 annually per worker. Elsewhere, it can be estimated to be anywhere from $9-$23 dollars a square foot. As companies expand, one of the largest hindrances to their growth is financing or finding suitable buildings. The United States has nearly $16 trillion dollars of commercial real estate in total. While more and more companies looking to get these liabilities off their books and letting their employees remain at home, or in many cases finding themselves unable to keep making payments on mortgages taken up before the pandemic, the market for commercial real estate seems to be in crisis.
One solution for property owners, looking for any way to make their buildings profitable in the face of such low demand for offices, remodels/transitions that would see commercial real estate transformed in many cases into housing. In New York in particular, where housing is seemingly always in demand, many of these landlords see more potential in residential spaces than office space that is suddenly antiquated. City projections show that Manhattan office towers are now worth 25% less than they were as things stand. That said, conversions of these properties are often complex and can become expensive. Dimensions can be tricky and uniformity in development has to be sacrificed when converting boardrooms into bedrooms.
On the other end, hotel companies in many places are trying to dump off properties that have been bleeding since the pandemic. In the face of an affordable housing crisis all around America, where someone working a 40-hour week at minimum wage cannot afford a two-bedroom apartment in exactly 0 counties nationwide, the prospect of selling these unprofitable hotels into affordable housing has been promising for developers and brokerages. While many hotel chains have been hesitant to see their stake in the property, in the hopes that the tides will turn, Ted Houghton, an affordable-housing developer working with this goal in mind noted, “No hotel has a for-sale sign on it, but every hotel could before sale”, especially in the wake of rising costs and declining rates of travel. In New York specifically, state budgets passed this year allocate nearly $370 million towards these transformations that would bring more affordable housing to the market.
The trend towards remote work has gone even further as to raise questions regarding the central purpose of offices generally. Where commercial real estate was once marketed with the focus on fitting as many workers as possible in a small space, in order to save money, the collaborative aspects of the “office” could remain while individual workstations are relegated to desks at home. This has often been the pitch of brokerages looking to salvage what interest they can in offices that have been left behind. That said, the real crisis is yet to come. As many office leases are held for multiple years, more and more of these contracts will go unrenewed and the question of what to do with this empty space unanswered. No one can predict the future, but the office will likely never look the same again. The other good news for these landlords is that interest rates remain low. Anyone looking to buy into one of these properties right now can do so with low mortgage rates in large part due to rock bottom interest rates as the Fed maintains its growth-friendly stance while COVID recovery begins. That said, when this reverses course, it could compound with these larger trends in the workforce to bring about a real crisis in the real estate market. No one is denying the efficiency and productivity boosts that in-person work creates but for many workers the comforts of their own home offer benefits that are just as enticing.
That said, beyond the financial benefits remote work is offering for firms, there are plenty of personal benefits for the employees that see the relief from the stresses of office life as bountiful. Without the trivial travel or time constraints, and commute distances that often make life harder for workers, and often shrink applicant pools, the return to the office seems like a lose-lose for businesses and employees even as the pressure or brokerages and landlords tightens.
The need for physical space for business will not go away, warehouses, server space, showrooms and more all still have a hold-in niche market, but it seems it was only a matter of time until the necessity of physical offices came into question. The intangible benefits for workers, many of which have spent the pandemic with the flexibility to make their lives easier, will not easily be taken away are if anything reflected in the seemingly universal desire to keep work remote. While the squeeze tightens on commercial real estate around the country, only time will tell how these spaces will evolve. While potential is there to use this opportunity to address housing crises while also cutting costs for firms, it remains to be seen what normal will really look like as we get back to work.
