Why It's So Difficult to Discern Where Office Use Will End Up

It was just the other day that the Federal Reserve Bank of New York told CRE people in the office sector not to get overly worried. Although remote work was clearly here to stay to some degree, the amount of workspace in greater New York City was stable.

Just one problem: not all large tenants are buying it. As the Wall Street Journal reported, there are big companies taking additional looks at office usage because they’re concerned about an economic downturn and whether they need to spend at their current rate for space they might not need.

“Companies including consulting firm Korn Ferry, business-listings provider Yelp Inc. and government contractor Leidos Holdings Inc. are scrutinizing their space needs again as they contend with high inflation, rising interest rates and an uncertain economic outlook,” the Journal wrote. “Many businesses also have a better sense now of how many people will come back to the office on a regular basis.”

And now KPMG, which had announced it would relocate from multiple locations in Manhattan to a new building in Midtown, dropped the other shoe. According to a separate Journal story, the consulting firm plans to shrink its office space by 40% in the process.

And this is all in Manhattan, which was at the heart of the New York Fed’s analysis. The result is an unpleasant point for the office industry: Trying to make predictions at this point is next to impossible for a few reasons.

One is the lack of robust data. Insights into the amount of office space that companies lease in any given city isn’t nearly enough. To understand potential trends, it’s necessary to also monitor usage, like how many people are showing up to work in offices and the patterns in which they do. Without a view of what’s happening on the office floor, trying to gather what executives might eventually do is next to impossible.

Next is an economic masking effect. As some market watchers have told GlobeSt.com in the past, many companies made it through the pandemic reasonably well, especially with all the rescue aid from Congress and the Federal Reserve. They didn’t have to immediately dump office space, even with many people working remotely, because margins were healthy and the cost of real estate already covered. The danger was any assumption that companies would continue on this path indefinitely.

Third, companies often make strategic decisions on long timeframe. Executives are waiting for more data, not only on internal space use in this case, but something to assess the overall economy and then determining what they should do.

It has been premature to take a pulse on businesses and assume the answers showed a steady path into the future. If economic pressures in the forms of ongoing supply chain issues, inflation, resulting higher interest rates, and more press hard enough, executives might look around and start counting all those empty desks and the annual amount the space runs.