Would a Recession Be Good for the Office Sector?

It takes a degree of desperation for an industry to hope for a recession as a way out of a business jam. That is where at least some of the office market currently stands. With occupancy rates down — Deloitte Consulting has told GlobeSt.com that nationwide they are 40% to 45%, compared to daily rates of 61% to 65% before the pandemic — owners and operators see a potential for the foundation of their businesses to crack.

The hope many have expressed is that a recession would result in large numbers of layoffs and reductions. The expected result would be employers gain significant leverage over employees, who would then return to offices en masse from fear of job loss.

Significant job losses typically accompany recessions, as, among other sources, research at the Federal Reserve Bank of Cleveland shows. Every time there is a recession, there is a significant spike in the unemployment rate. Conversely, every time the unemployment rate undergoes a substantial increase, there is a recession.

According to the most recent survey by the National Association of Business Economics of its members, the forward-looking net rising index — the percentage reporting an increase versus those reporting a decrease — for employment over the next three months was -7, 15 down from the October 2022 figure. That’s the first time since 2020 that the outlook turned negative.

The Wall Street Journal reported that staffing firms have been dropping temp workers for five straight months. “In the last five months of 2022, employers cut 110,800 temp workers, including 35,000 in December, the largest monthly drop since early 2021,” the Journal wrote. “Many economists view the sector as an early indicator of future labor-market shifts.”

However, whether companies will largely cut jobs has to be seen in context. The current unemployment rate of 3.5%, also matched in February 2020, has been otherwise unmatched since November 1953. The country has seen an unusually low rate of unemployment. There is also still a significant shortage of labor to meet the demand represented by jobs that companies have open.

That leaves a currently unanswerable question of whether employers on the whole would have the negotiation advantage to force people back into the office.

This is likely a reason why Cushman & Wakefield, in its “10 Critical Questions For 2023,” asked, “Will a recession spur more people back to the office?”

“In-person office attendance trended higher throughout 2022 as the pandemic faded,” they wrote. “As recession fears climbed in recent months, the trend has become stronger. The long-term trend in office usage is going to be driven by the ability of building owners and occupiers to create spaces and places where employees want to be, are productive, and have options to connect, innovate and get all types of tasks done efficiently.”

In other words, even in current uncertainty, the issue of getting people back into the office may be more attracting them than relying on the ability to command someone’s return. Cushman & Wakefield analyzed cell phone location data and found that employee office attendance when there are “myriad restaurants, cafes, experiential retail” locations around recovered three times as much as in “non-vibrant” neighborhoods.

And then, it’s important to remember that during challenging economic times of a recession, companies look to cut costs. Once they’ve shed employees and other internal costs, they might turn their eyes to investment in real estate and take a hard look at just how much office space they really need.