An article I recently read by a colleague of mine, King White, inspired me to sound off on the impact of companies “Return to Office” policies intended to bring employees back into the office on a full-time or nearly full-time basis in an effort to boost productivity and employee engagement.

The office real estate market is facing a transformational shift, driven largely by changes in how businesses operate post-pandemic. The return to the office has not been a full rebound to pre-pandemic norms, resulting in a surplus of available office space and a move toward hybrid and flexible work models. To navigate this landscape, companies should seek guidance from experienced corporate real estate advisors to optimize their real estate strategies.

King White’s article explores the effects of the ongoing return-to-office movement post-pandemic. As companies shift to hybrid models, the demand for traditional office space has drastically changed. The article highlights the following key points:

1. Shift in Office Space Demand

• Hybrid Work Models: About 65% of companies have returned to physical offices in some form, but only 30% are full-time. Hybrid work has become the standard, reducing the need for permanent office space.
• Vacancy Rates: As of Q4 2024, the U.S. office real estate market has 1 billion square feet of vacant space, marking a historic high. Major cities have vacancy rates surpassing 15%, with some regions experiencing even higher rates.

2. Class B and C Office Space Struggles

• Flight to Quality: Companies prefer modern, higher-quality spaces (Class A), leading to higher vacancy rates in Class B and C buildings.
• Declining Rental Rates: With the oversupply of office space, rental prices for lower-quality office spaces have dropped, potentially benefiting small businesses seeking more affordable options.
• Adaptive Reuse: The surplus of unused Class B and C offices presents an opportunity for redevelopment into residential units or mixed-use spaces.

3. Challenges for Capital Markets

• Banking Pressure: Banks are under pressure due to a decline in office building valuations (down by 15-20%, potentially 25% by 2025). This is exacerbated by an increase in commercial mortgage-backed securities (CMBS) loan delinquencies, potentially reaching 8.1% in 2024 and 9.9% in 2025.
• Refinancing Challenges: Due to high vacancies and lower property values, building owners face difficulties in securing new loans or refinancing existing office buildings.

4. Role of Corporate Real Estate Advisors

• Guidance for Businesses: With the office space market undergoing significant changes, companies need expert advice. Corporate real estate advisors can assist in resizing office footprints, negotiating economic incentives, and making strategic site decisions based on current market trends.

Conclusion

The office real estate market is facing a transformational shift, driven largely by changes in how businesses operate post-pandemic. The return to the office has not been a full rebound to pre-pandemic norms, resulting in a surplus of available office space and a move toward hybrid and flexible work models. To navigate this landscape, companies should seek guidance from experienced corporate real estate advisors to optimize their real estate strategies.