By Jennifer Hopkins, MBA and Olivia Czyzynski, SVN Chicago Commercial
The commercial real estate (CRE) industry has traditionally been relatively stable but can be impacted by the economy with normal ups and downs based on economic fluctuations. However, when COVID-19 hit, it was unprecedented and something the world had not seen in many years. The CRE industry started preparing for the changes that came along, including business shutdowns and many employees working from home.
Although it was expected that the retail market would be the hardest hit sector, it turned out that the office market ended up being significantly impacted. The overall issues and pending work-from-home approach have had a major ripple effect on office markets across the nation.
Jennifer Hopkins, SVN Chicago Commercial
The Chicagoland market was impacted particularly hard, and this included the suburban Chicago markets. Chicagoland is broken out into several main commercial hubs: the city of Chicago, the East-West Corridor, the O’Hare market, the Northwest suburbs and the North suburbs. According to CoStar, office vacancy rates increased in all these markets. In 2020, the vacancy rates ranged from 7 to 20 percent, but currently stand at 18.8 percent, 17.3 percent, 16.9 percent, 23.2 percent and 11 percent, respectively.
While no market has ever had 100 percent occupancy, even marginal increases in vacancy rates flood the market with hundreds of thousands of additional available square feet. This was originally thought to be a temporary effect of the pandemic; however, the office market has continued to experience significant vacancy as employers allow employees to work from home or provide a hybrid approach.
The result of this phenomenon was unforeseen. The impact it had on office properties and office owners was devastating. Those office properties and owners have absorbed the brunt of the impact with continued significant vacancies and loss of revenue.
Olivia Czyzynski, SVN Chicago Commercial
Furthermore, substantial vacancy had a consequential effect on the surrounding communities. Fewer daily employees in an area means less business for surrounding services such as restaurants, retail, entertainment, etc. The newly adopted work-from-home approach has changed the current dynamic of office space. The million-dollar question is, how long will this last?
While working from home may seem like a great idea, providing employees more flexibility and less commuting time, is it really a positive for businesses’ bottom lines?
Yes, employees save time on traveling and workplace distractions, but are they as focused and productive as they are in the workplace, surrounded by other colleagues? Family, chores and errands can all get in the way of work as well. The big unknown is what the future holds for businesses and work-from-home employees in 2023.
It appears that companies will be requiring employees to come back to work this year. According to ResumeBuilder.com, which surveyed 1,000 business leaders to find out if their companies have or will implement a return to the office, the following was discovered:
• 66 percent of employers currently require employees to work from the office
• 90 percent of companies will require employees to return to office in 2023, either as a hybrid schedule, or full-time
• 21 percent of companies will fire workers who do not return to the office
• 88 percent of companies are offering incentives to get employees to return, including catered meals, commuter benefits and higher pay.
Employees, on the other hand, do not seem to be fully on board with this corporate approach. According to passport-photo.online, the majority of employees want to continue having a fully remote, or at least a hybrid, work-from-home schedule. But will employee preferences dominate the market? Below are stats showing a survey of employers’ views on heading back to the workplace:
• Only 4 percent of companies have made everyone return to the office full-time
• 90 percent of companies have allowed hybrid work schedules
• 50 percent of leaders say their organization requires or plans to require workers to return to the office full-time in 2023
• 60 percent of managers agree or strongly agree that a full-time return to the office will occur shortly
• 28 percent of businesses have decided who should work from where
• 75 percent of executives anticipate that at least half of all their employees will work from the office
• 68 percent of executives believe regular employees should be in the office at least three days a week to maintain a company culture.
Overall, there seems to be discord between employee versus employer preferences. As time moves forward from the pandemic, it appears that employers will start to push more for employees to work from the office. This may be a factor in how businesses view the overall impact of working from home on their bottom-line profits.
Remote work will most likely never completely go away. Millennials are a stronger driving force for remote work versus baby boomers, as the latter are more accustomed to working in an office setting. However, as the newest generation enters the workforce, and employers require more of their staff in-office, we will most likely see a stronger, albeit slow, office demand in the commercial real estate sector.
Office demand will most likely begin to increase again but is predicted to be a very slow recovery. Kastle.com, a cloud-based software provider, offers weekly reports that track office occupancy across 2,600 buildings and 41,000 businesses in major U.S. markets, for employers and investors to follow. Additionally, it is expected that rents will remain flat with no substantial increase until some of the vacancies are filled, and vacancy rates begin to drop.
However, landlords can make improvements to help increase interest in their properties. Employers are enticing their talent by offering them work incentives. Landlords can support this trend by offering desirable amenities to help bring the work-life balance into the workplace.
Amenities include fitness and game rooms, fresh and healthy food commissaries and vending options, as well as comfortable and beautiful gathering spaces. These offer employees a more pleasant atmosphere, all the while making coming into the office a more enjoyable experience.
As the work-from-home tendency adjusts and companies continue to move forward — requiring employees to return to the office — there is hope for office properties to recover from the significant vacancies and for landlords to increase their rent revenues through 2023. There is optimism for the future of the office market as landlords continue to modify their properties to meet the new demands of businesses and employees.
The impact of the pandemic has caused a change in the office space and work-from-home, depicting a modern approach of what the new office environment will morph into. This new office age offers employees, employers and businesses a refreshed work climate.
Jennifer Hopkins, MBA and Olivia Czyzynski are both vice presidents with SVN Chicago Commercial. This article originally appeared in the March 2023 issue of Heartland Real Estate Business magazine.