Resource shines spotlight on the need for office space amid hybrid-work world
Remote work will continue to play a key role in the demand for office space and how it will be used, according to a new whitepaper in which the Mortgage Bankers Association highlights its potential impacts on commercial mortgage loan volume and property values.
“Thanks to a very tight labor market and technological advances, hybrid work reigns two and a half years since the onset of the COVID-19 pandemic, with employees at many companies coming into the office a few days a week,” said Mike Fratantoni, MBA chief economist and co-author of the whitepaper. “The extent to which this trend will continue – and what it means for the office market – will greatly depend on employees’ and employers’ costs and benefits of being in the office versus remote and whether a transition to a looser labor market tilts the bargaining table to employers and their preference for more in-person collaboration.”
The whitepaper, titled A Framework for Considering Office Demand in a Post-Pandemic World, found that “remote work can be just as, if not more, effective than office work in terms of getting the job done, while also providing a range of tangible short-term benefits.” Findings also revealed that workers rely heavily on in-person interactions to develop workplace capital, helping them thrive over the long term.
MBA also presented two scenarios in the whitepaper to analyze the general outlook for the office sector:
“In the base case scenario, the five-day in-person work week would not return, replaced instead by a negotiated company and worker balance of remote/hybrid work,” MBA wrote. “Using the dot-com crash as a parallel, a slow, 10% to 20% decline in demand for office would ensue, with the decline impacting leases ending over the coming decade and with varying impacts across geographies. Price declines to reflect this lower demand could happen initially before stabilizing, while the impact on net operating income (NOI) would be spread over a decade.
“In the alternative case, a pre-pandemic return to normal would lead to a jump in office demand, followed by an increase in property values due to years of relatively low levels of new construction. Delinquency rates and loan losses would remain subdued – especially as ‘rescue capital’ looks to find value in mispriced assets. Higher-quality properties would continue to attract premium tenants, rents, and values while lower-quality properties would not be as negatively affected as in the base case.”
Jamie Woodwell, MBA vice president of commercial real estate research and co-author of the whitepaper, commented: “There’s a fundamental tug-of-war going on about whether office work remains a ‘need to have or if it becomes more of a ‘get to have’. The more workers and employers’ need to be in the office, the greater the overall demand – and the lesser the differentiation – there will likely be for space. The more we ‘get’ to be in the office with hybrid trends sticking, the more users will pay up for properties that maximize that time while also deciding to shed space in properties that do not meet these preferences.
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“The likely outcome is a mix of the whitepaper’s two scenarios, with geography, labor market conditions, industries, and company and employer preferences all playing a role in future leasing structures, property values, financing terms, and space requirements. Ultimately, in either scenario, it is unlikely that the office market will ever return to its pre-pandemic shape, size, and dimensions.”
