Effects of Remote Work on Commercial Real Estate Demand

Many aspects of our lives were all changed during the pandemic. The way we work was one of the biggest shifts. Remote work goes from a perk in some companies to a necessity for many. The fallout is still today. The biggest change that really has an impact on commercial real estate is that you want to be where the productive class lives. Large office spaces are again being reconsidered by companies. There has been noticeable changes in the demand for commercial real estate. Some of these changes were not unexpected. Others were predicted. All of them are important to understand, but…

Many businesses initially adjusted quickly to remote work. They cut down on their need for office space. Other major corporations like Twitter, Meta and Salesforce, all reduced their office footprints. It heralded a move toward greater flexibility in how work is done.

Effects of Remote Work on Commercial Real Estate Demand - 95dubai.com Blog Illustration — Effects of Remote Work on Commercial Real Estate Demand – 95dubai.com Blog Illustration

The data is clear. During the pandemic office occupancy rates dropped enormously in major cities such as New York, San Francisco and London. Not all of the locations have the same good news. The office vacancy rate in the U.S. peaked at almost 19 percent in 2023, according to a recent report by CBRE. It is the highest rate in decades. This isn’t just a blip. It is a big shift in how companies think about their office needs.

It’s not solely about declining demand, however. And with remote and hybrid work comes opportunities too. With traditional office demand weakening, the companies are rethinking space. We’re also seeing more growth in areas that include coworking spaces and regional hubs closer to suburban areas instead of large offices in urban centers. Devised for workers who don’t want to commute to city centers but need to work together, this change helps.

Operators of flexible space like WeWork and Regus are once again in vogue. And so the companies are wrestling with the trade off between smaller, more flexible spaces and the cost of having people in them in person.

Interestingly, other sectors are adapting while traditional office spaces fail. For example, there has been an increase in demand for warehousing. The reason for this is booming e-commerce sector. We use more of the stuff we can get in boxes. More of us are working from home and shopping online. Large companies such as Amazon are building their logistics networks. This transition has benefitted industrial and warehouse spaces.

In other words, it’s a direct result of how the pandemic changed consumer habits — and, therefore, commercial real estate needs.

Commercial real estate in a remote-first world doesn’t have to be the end up some dark road we are now upon. Instead of disappearing, office spaces are becoming evolutionary. Rows of desks are giving way to many companies transforming their offices into collaboration spaces.

For instance, Google has redesigned its offices so that open and creative areas are where people are placed to do group work. And this is indicative of a belief among that creativity and value can still be found with in person interactions, but in more targeted and occasional fashion. When translated, this means that although the total square footage is decreasing, the goals and disposition of the space are being reinvented.

A new view is needed for investors and stakeholders during this evolution. Office space isn’t useless, but it’s more about adaptability. Traditional offices, coworking areas, or mixed use will be well served by spaces that can flex between different needs.

The thinking needs to be creative for companies that own or manage properties. Even if they are only in the office a few days a week, they should be focused on amenities that will attract people in. Even the leasing strategies are also shifting. As tenants are less sure of what their space needs will be in the near future, shorter, more flexible lease terms are becoming more attractive.

The bottom line? Commercial real estate is not dead. It’s transforming. Things are never the same after remote work. It’s encouraging it to become more adaptive, diverse, responsive to changing work trends.

To businesses, these changes need to be taken into consideration when making decisions around office space. For real estate investors the adaptation exists. Early adopters will be those who can see a way through this uncertainty and find ways to flourish. So as the workplace changes, so too will the need for the spaces that work happens. This means new challenges but new opportunities.

References

CBRE. Office Vacancy Rate Hits Record High in U.S. During 2023. CBRE, 2023.
WeWork. Resurgence of Flexible Office Spaces Post-Pandemic. WeWork, 2023.
Amazon. Expansion of Logistics Networks During the Pandemic. Amazon, 2023.