The Current State of the Commercial Real Estate Office Sector

Abstract

In January 2023, approximately 50% of Manhattan office workers were in the office on an average weekday; roughly 10% of the local workforce was fully remote; and only 9% of employees were in the office five days a week. These city-level trends are also reflected at the submarket, market, and national levels. As of 2023, 13% of full-time U.S employees work entirely from home, while 28% work a hybrid model. The Covid-19 pandemic’s impact on commercial real estate, particularly the office sector, is still being felt three years later. Due to the 2020 outbreak of the coronavirus, regulators worldwide implemented lockdowns, forcing employees to work remotely indefinitely. And to the surprise of many, this trend has continued unabated.

The adaptation of the work-from-home model by a myriad of office real estate tenants caused a significant decline in office space demand. According to commercial real estate services firm, CBRE, the U.S. national office market reported 16.5 million sq. ft. of negative net absorption in Q1 2023 (the weakest quarter for office demand in two years), bringing overall vacancy up to 17.8%. The concept of remote working has long been criticized and rejected. The prevailing belief was that employees are simply not as motivated nor productive working from home as opposed to the office. Additionally, critics further argue that it is impossible to build and maintain a company office culture if your employees are not physically present in the office. Simply put: the remote work model was widely regarded and portrayed as a productivity and culture “killer”. The temporary lockdowns in 2020 however presented a unique (and forced) opportunity for those theories to be tested. Three years later, it’s safe to say that the paradigm of traditional workspaces has undergone a seismic shift thanks to the Covid-19 pandemic. The remote-work model's benefits and limitations have largely come to light, prompting employers and employees to respond accordingly.

With an increasing number of companies cutting down their real estate footprints, rising vacancy rates, and plummeting valuations, what exactly does the future hold for the office sector? How are investors, landlords, and tenants affected? These are some of the questions that I look to address throughout this paper, for which I’ve interviewed three highly regarded and respected industry experts.