The Office Of The Future
Welcome to The Real Estate Expresso podcast, your morning shot at what’s new in the world of Real Estate Investing. I’m your host, Victoria Menasce. On today’s show, we’re talking about the changing office environment. The COVID era created a lot of distortions. People got paid to stay home. The requirement of social distance meant that most things done in person were now being done elsewhere or at home. School, gym classes, meetings, court hearings, and work all were virtual. Sure it was more fun to sit in the Zoom meeting in your pajamas. When effective office work requires team collaboration, virtual environments do deliver an inferior result. It takes an extremely mature organization to get top performance out of a virtual team.
Back when I was in the tech industry, we used to reorganize the physical layout of the office regularly in order to co-locate people who would benefit from working together. It was not enough for people to be located in the same building or even on the same floor. Studies had shown that the amount of interaction between people fell off dramatically once the separation between them exceeded 50 feet. So if a team needed to be close-knit, we would put them together.
While working at home has some benefits, their drawbacks are real as well. Training and mentoring for newer employees definitely suffers in a remote environment. Those new workers feel isolated and they waste tons of time trying to figure things out on their own instead of asking a co-worker.
So here we are in 2024. The pandemic is a fading memory. People are resisting coming back into the office. Office vacancy rates are creating major havoc for institutional investors and for lenders.
Think about who is about to be inaugurated into the White House. Elon Musk, as part of the department of governmental efficiency, is likely to repeat something that he’s already implemented in his businesses. He has already mandated that employees at Tesla, SpaceX, Twitter, and his other businesses come back into the office or seek employment elsewhere. Donald also owns commercial real estate assets in New York. About a third of the federal workforce is still working from home in some capacity.
Businesses know that an office environment is going to deliver better results than working from home on average. Some people are less productive and less disciplined if nobody’s watching. These people are probably in the minority, but still, when it’s measured across the millions of workers in the entire federal government, or across an entire nation, it’s a measurable effect.
You can expect the U.S. federal government to mandate workers back into the office. How many state and local governments will follow suit? How many businesses will follow? We might be seeing the tip of the iceberg when it comes to renewed demand for office Offices in many major centers are vastly underutilized. New York office space is at 23.6 percent vacancy. There’s 100 million square feet of vacant office space in New York, and there’s another 22.6 million square feet of subleased space in New York.
These are huge numbers. Houston’s office vacancy is at 26.3 percent. San Francisco is at 36.9 percent vacancy. Los Angeles, 32.8 percent vacancy. Dallas, 26.1 percent vacancy and Chicago suburban office space at 26.2 percent vacancy. These are alarming numbers. These numbers will result in bankruptcy for an entire industry, and I was looking at a potential acquisition of a building in downtown Houston that’s 80 percent vacant.
Now, in that case, it might have been a candidate for conversion to residential. Of course, I cannot predict the future. Nobody can. But I’m going to go out on a limb and predict that we are somewhere near the bottom of the office market when it comes to vacancy. I believe we will see a rebound in demand for office space starting on January 20.
This is going to act as a catalyst for more business owners to mandate a return to the office environment. That doesn’t mean that distress in the office market’s over. There’s still likely to be more pain hitting that market in the coming months, and maybe years. The number of buildings that have gone to foreclosure is still relatively small compared with the size of the problem. You might be able to pick up some bargains for good quality assets in good locations. Some office assets might be well priced.
We may see a surge in demand or maybe only a modest recovery in demand over the next year. Either way, I’m predicting an uptick in demand. The tide is going to be rising here. That doesn’t mean demand will be uniform. Of course, remember, real estate’s hyperlocal. There’s going to be more disruption. Maybe as many as a million U.S. federal government workers will be out of a job in the next year. Who is their new employer going to be? How many of them will move? Who will be hiring?
As many as a million illegal immigrants to the U.S. might be deported. Who will fill the jobs left behind by those people when they’re no longer in the U.S.? I don’t have all the answers. In fact, I probably don’t even have any of the answers, but it starts by asking good questions and maybe eventually better questions.
It could just be that the office of the past is, in fact, the office of the future. As you think about that, have an awesome rest of your day. Go make some great things happen. And we’ll talk again tomorrow.
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