What use of office space in U.S. could look like by 2022

As Covid-19 spread across the U.S. in 2020, emptying offices and forcing businesses to adapt quickly to a remote-working environment, many predicted a looming crisis in the commercial office market. But as the American economy recovers at a faster-than-anticipated pace a year later, the attitude from companies and workers now seems to have shifted toward a more optimistic, “Let’s wait and see.”

Over half of American companies expect to maintain a similar physical footprint or even expand in the post-pandemic environment, according to a recent survey of employees in professional and financial services conducted by Arizent, the parent company of National Mortgage News. However, Covid-19 still dealt a huge financial blow to the commercial office market, and it will be months before a complete picture emerges of the pandemic’s effect.

“There is definitely going to be some continued weakness ahead in leasing in the next 12 months because it takes a while for actions in the real economy — like hiring and GDP growth — to flow through to office demand because leases are fairly long, anywhere from a couple of years up to 10 to 15 years,” said Paul Leonard, managing consultant of CoStar, the research platform serving commercial real estate.

Although the volume of commercial office financing has picked up after bottoming out at the end of 2020, current numbers are still far below 2019 levels. Research conducted by Costar and Wells Fargo Securities showed net absorption — the variation in size between new vacancies compared to new occupancy — tumbled to its lowest point on record in the first quarter of 2021, with massive amounts of sublease space available. The increased popularity of staff splitting time between home and the office also signals that it will likely be a permanent workplace option.

“Businesses appear to be seeking out flexible office space to better accommodate hybrid work models, which will likely slow the growth of office demand going forward,” according to Wells Fargo’s Economics’s commercial real estate chartbook.

But maybe not to the extent once anticipated. Nearly 30% of the Arizent survey respondents said worker preferences were a primary factor in determining the plan for returning to the office. While employees are likely to do more tasks remotely, they also expect a less crowded and safer environment when they head to the office in the post-Covid era.

“Even if you have less people in the office than we had before, you may need to keep similar space just to keep people spaced out when they're in the office where they were before, to keep them happy,” Leonard said.

Accommodating those wishes would likely mean accelerating the trend of “hot desks,” or pre-booked hoteling stations, while phasing out dedicated workspaces. Renovations for this kind of set-up will require overhauls of older buildings in order to make necessary tech improvements, according to Wells Fargo’s research.

“It’s really going to vary by company, by industry and by city, and I suspect that some of those hoteling stations will wind up being in the suburbs closer to where folks live,” said Mark Vitner, senior economist at Wells Fargo, in an interview. Suburbs are home to many older-generation office complexes that would require upgrades.

But even as the pandemic demonstrated that a high rate of production could be maintained with a decentralized staff, Vitner says the remote-work trend has not made the office obsolete. If anything, the events of 2020 showed the need of having staff working together at a single location in order to maintain some form of corporate culture.

“I think that we've learned there are new ways to work remotely that will enable the workforce to be more flexible, but I don't think that working remotely is going to be the dominant way to work, or even a common way.” he said.

As if to illustrate the point, many of the largest corporations have shown few signs of backing off expansion. In December, Peloton announced it would lease over 100,000 square feet of additional office space at its regional campus north of Dallas. Facebook leased or purchased over a million square feet of office capacity across the country in the past year, even as it reiterates its commitment to offering remote work options. And construction continues on JP Morgan Chase’s new 2.5-million-square-foot skyscraper in Manhattan.

Rather than spurring an exit from the office, the pandemic may instead help usher in a push toward more higher-quality spaces. In Arizent’s survey, 10% of respondents indicated that their firms planned no major downsizing in physical size, but expected to switch up locations to support a more distributed model, which might favor migration to efficient buildings and prime locations. It’s a similar trend to what CoStar has found in its research.

“They're not going to be willing to compromise on things like really high quality HVAC systems and air purification. And people are generally looking for that better ESG policy, and if they can get that through their real estate — more than ever, that's becoming a priority for companies,” Leonard said.

Office demand is likely to become clearer after Labor Day — the target date that many employers have set for employees to return. But the Covid-19 disruption was so severe and unexpected that it has made forecasting office demand more challenging than during a typical down cycle, according to Leonard. It won’t be until 2022 that business leaders and developers can get a full idea about how the future office environment will be shaped.

“One thing that has been tricky this past year is — how much of the slowdown is permanent remote work related?” Leonard said. “A whole company didn't lease any space last year, and did they do that because they're not planning to ever go back, or do they do that because they just need to take a breather here and wait it out until they have a better sense of their own business?”