Even the Next Recession Won't Send Employees Back to the Office

By the beginning of 2021, live and leisure activities like sporting events and concerts were going back to normal — but office attendance still lagged. And that begs the question: will office usage ever return to normal/?

“The big movement toward working from home was started by the pandemic, but at this point, it would be hard to argue the people are still it doing because of health risks,” says Marcus & Millichap’s John Chang. And while most companies would like their folks back in the office, “even the most adamant business leaders have had to back off their hard line positions,” he says.

The reason? A booming employment market. The US added 3.5 million jobs during the first eight months of this year, well above pre-pandemic norms, and unemployment is hovering at 3.7%. (The rate for college-educated people is just 1.9%, well below the 3.1% 20-year average for the segment.) The tight labor market is sustaining the WFH trend as companies are increasingly looking to WFH policies as a way to woo and retain talent.

The next recession likely won’t be severe enough to change the prevalent hybrid model, Chang says. He analyzed past recessions to determine how job losses might impact office usage and found similarities to the 1990 recession, which saw a 400 bps rate hike by the Fed amid elevated inflation that resulted in 1.3% job loss, or 2.1 million jobs in today’s terms. But he says similar losses today “probably wouldn’t be enough to get staff back into the office.

“Remember, right now there are about 5 million more job openings than there are people looking for work,” Chang says. “There’s a labor shortage. So unless we have a more severe recession…the employment market is simply too tight for companies to bring employees back to the office full-time. And that impacts all types of commercial real estate.”

Barring a major economic disruption, it will likely take years for office employment to recalibrate and realign with the employment market, Chang says.

“It appears office space demand has structurally changed,” Chang says. “The labor shortage is key and it will like be a driving factor for commercial real estate, a factor that investors will need to watch.”

Suburban office will likely lead the recovery, having outperformed CBD markets over the past two years, serving as a “middle ground’” between working from home and commuting to an urban core. Suburban office absorption hit 2.2 million square feet in the first quarter, according to Colliers, while CBD office markets posted negative 2.6 million square feet of absorption during the same period.

Earlier this year, Colliers US CEO Gil Borok told CNBC that his firm’s professionals are seeing more interest in suburban markets from buyers.

“Pretty much anywhere where there’s a lesser commute or you’re in a suburban area or a less dense area—that’s from an office standpoint where folks are most likely to return,” he said. “And in terms of opportunities, if you’re an investor, obviously those markets follow suit.”

A recent analysis out of the NYU Stern School of Business and the Columbia University Graduate School of Business, predicts significant changes in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as a result of enduring WFH and hybrid work policies, with potentially big impacts on valuation.

“We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction,” they wrote. “Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.”