One of the most significant results of the global pandemic was that workers who suddenly had to work from home found they liked it.
The result is a developing crisis in commercial real estate that has some property owners defaulting on loans or struggling to make payments.
The data tells us why:
According to the U.S. Census Bureau, the number of people working from home soared from 5.7% to 17.9% between 2019 and 2021. That’s more than 26 million people who have the joy of handling Zoom calls just steps away from their refrigerators.
A column by Peter Foy in the New York Times has a chart that illustrated the impact remote work policies have had on the commercial real estate sector. According to the data provided by Kastle Systems, office occupancy rates in Chicago were 31.2% on the lowest day and 69.6% on the highest day from Jan. 25-31.
Tech hubs such as Austin, Texas and San Jose, Calif., saw much higher numbers of people opting to work remotely, according to the report cited by Foy. In Austin, nearly 80% of workers in the last week of January stayed away from the office at the high end. That number was 55% in Austin.
The data show the problem for commercial real estate owners: If as much as a third to four-fifths of office space isn’t used during the week, why should a company pretend it needs space for a 100% in-office work force?
The simple answer is they don’t.
As leases come up for renegotiation, companies are decreasing footprints to match employment realities.
Moody’s reported Jan. 8, 2024, that the national office vacancy rate was 19.3%, a number that ranked with two other economic events: “in 1986 driven by a five-year period of significant inventory expansion and the other in 1991 during the Savings and Loans Crisis.”
By one account, $1.2 trillion of losses are lurking on balance sheets. Federal Reserve Chair Jerome Powell noted Sunday the commercial real estate sector’s woes are just beginning. He also warned more small banks might close as a result of dropping valuations, although he said a repeat of the Great Recession of 2008 was not in the offing.
Remember, the Fed always speaks in the most muted of tones so as not to create “irrational exuberance” in the markets.
This problem is akin to a highway chain-reaction collision, where long after the first vehicle crashes, others pile on. Banks are worrying about current office space portfolio holdings, but they are also wary the next few years may bring further challenges.
The average commercial lease is now about seven years for office space (and some commercial segments average much longer terms). This means more companies will continue to renegotiate or walk away from commercial space for the next few years as pre-pandemic contracts come up for renewal.
There are mitigating factors. Some commercial space can be converted to other uses and some companies are mandating a full or partial return to the workplace.
Will it be enough though? There are many uncertainties, not the least of which is the overall health of the world economy.
One thing’s for certain, the five-day workweek in the office is unlikely to make a fast comeback, and that isn’t going to help the problem go away quickly.