The Secret Incentive to Bring Employees Back to the Office

There has been some return to office, but nowhere nearly enough to bolster vacancies, return confidence to investors, and reduce concern of owners whether existing business strategies will work.

Landlords and tenants have been considering how to entice employees back to the office for more than a year. They’ve discussed restaurants and food courts, fitness centers, private outdoor spaces, ergonomic seating, or access to a vibrant city center, as some examples. But some research over the last year suggests that the best incentive is also the one that would be the most out of the control of property owners or tenants.

A new MCSI report by MSCI Research Executive Director Jim Costello, Better Incentives Could Quicken a Return to the Office, addresses the point. He wrote that Labor Day 2023 represented “a point where for the last two years investors have wondered if office workers will return to post-pandemic levels of attendance.”

Central business district offices hit a “record high” 17.7% vacancy rate in 2023 Q2 “for the high-quality assets tracked as part of the MSCI U.S. Quarterly Property Index.” And so, probably much higher for Class-B and C offices. 

The top buildings in the CBD have a higher vacancy rate now than suburban office, which are at 16.6%. “From 2008 to 2019, by contrast, CBD vacancy averaged 180 basis points lower than suburban,”’

But the one potential offering that Costello found often lacking was all about the travel to and from work. Commuting time and experience depend on where the office and employee are respective to one another.

“To arrive in Lower Manhattan from the New York suburb of New Rochelle at 8:30 a.m., for instance, one faces a minimum 70-minute commute time by train, with a change to the subway when in Manhattan,” Costello wrote. “Building in time to get ready for the day and get to the train station, a person may need to wake up before 6:00 a.m. to make an early-morning meeting in person. (New Rochelle is just 20 miles from Lower Manhattan.) By contrast, a worker living in downtown Brooklyn would face only a 15- to 20-minute commute to the same location at that hour.”

At best, that would be at relative best an hour and 40-minute additional time investment a day by an employee. Do the calculations — 100 minutes a day, five days a week, 48 weeks a year (52 weeks less 2 working weeks of vacation and 10 holidays, which makes 2 more working weeks) — and you get an extra 16.7 days a year devoted to getting to and from work. More than three additional working weeks.

“That time to commute has, in the past, translated to higher average wages for workers facing longer commutes,” he wrote. “Across U.S. metro areas in 2019, for every extra minute spent commuting, wages were USD 581 higher. Generally speaking, metro areas where workers face longer commutes put employers in a position where they must pay more to be able to attract workers.”

This isn’t the first time that a firm has pointed to the heavy impact commuting time has on office vacancy rates. In April 2023, Moody’s Analytics CRE analyzed the correlation between vacancy rate changes in metros and the percentage of workers who had less than a 15-minute commute. “There is plenty of ‘noise’ in the chart, but the general trend line does show that vacancy rates rose more in metros where it takes workers longer to get to work,” they noted.

That changes the entire dynamic of incentives, also making them potentially harder to provide. “If investors are worried about the rise in vacancy and reduction in demand for CBD offices, improving the mass-transit experience of workers in those locales would be a public-policy solution that could effectively act as a wage boost and incentivize some workers to return,” Costello wrote. “If, for instance, the Northeast Corridor had the equivalent of one of Japan’s Shinkansen lines, firms could draw in workers from a much wider area with shorter commute times to the city. Improving the safety and cleanliness would also help, as fewer disturbances keep trains running and would reduce the fear some people sadly face when commuting.”

He added that mandatory return-to-office policies effectively tell workers that they will lose net compensation (presumably because any additional pay, noted by Moody’s, through the depths of the pandemic are perceived as normal, so going back to the office is a penalty). Companies that need to bring all workers into centralized places will likely have to pay a penalty, because even with a cooling labor market, unemployment is still low.

“A darker future for CBD offices is a challenge real-estate investors face that is not of their own doing,” he wrote. “They did not overextend using debt or massively overbuild supply in these locations over the last cycle. Their tenants have an evolving relationship with their workforce that incentivizes many workers to stay away from the office. Public leaders haranguing people to come back to offices will likely face limited effectiveness as they ask people to defy their own self-interests. These same leaders could help these areas by promoting fast, efficient, clean and safe commuter rail and subways.”