The Demand For Office Space In A Post-Pandemic Market

September / October 2020

One of the looming questions real estate investors are facing during the Covid-19 pandemic is what the effect will be on the demand for office space. How long will the remote working trend continue after the pandemic ends? What effect will this trend have on the demand for office space? There are many financial and psychological considerations to the question of if lower density requirements and employees working from home will be a lasting movement, or whether this will be a temporary effect due to the pandemic.

It is difficult to gauge how much office space businesses will require after the pandemic ends. In the short-term, safety measures and the need for social distancing will lead to lower office density by requiring each employee to have more space. But should working remotely become a more widespread and lasting movement, the demand for office space could decline.

The decision to implement remote work for employees does not just depend on cost savings. Factors such as productivity, team building and the ability to share information also come into play. Additional considerations include how remote work is affecting the physical and emotional wellbeing of employees and the collaborative relationships they have established while working together in the office. To what extent can video conferencing replace meeting in person or bonding over lunch? A large U.S. tech company expects half of its staff will work remotely within the next decade. An employee survey at the same company resulted in 20% of respondents indicating they desired to continue working remotely after the pandemic, while 50% would prefer to return to the office.

The Work From Home Movement

Even before the pandemic, many workers were spending a part of their week working remotely. Although the long-run impact of COVID-19 might require more employees to work from home, it’s likely that many will do so only partially.

It is estimated that only 5.4% of employees worked remotely full-time before the pandemic, while 12.5% did so part-time and 68% did not at all. This is important for calculating the impact on office demand and for predicting how the pattern might change. Real estate analysts show a trend over the next decade of more flexibility in office use. Most agree there would have been a movement toward remote work even without the COVID-19 crisis, and we must consider how this experience may speed up the trend and create an era of increased remote work much sooner than previously anticipated.

A Change In Office Density

An increase in remote work is thought to decrease the need for office space. Someone working remotely four days a week needs less space than someone doing so one day a week. This may be an generalization as some tenants may maintain space to accommodate conflicts in employees’ schedules or a need to have more employees in the office certain days or seasons, meaning there would be less than a one-to-one impact on space needs.

In recent years office densities have increased considerably. Declines in space per worker has gone from less than 10% to more than 30% over the past decade. Social distancing requirements needed to prevent COVID-19 are expected to reverse this trend in the short-term. It is estimated that an increase of 10%-20% of space will be needed due to the effects of the pandemic, but this should slowly diminish after 2022.  Lower rents and higher vacancy should bring tenants back into the market. Declining development levels and potential changes in use through conversions to other uses can be expected to limit the rise in office vacancy and lower rents.

Offsetting Effects

Neither the need for lower office density or the movement to work from home will result in immediate changes in office demand. Analysts anticipate changes to office space will be gradual as tenants adjust to the new working environment. What the new office space market looks like will not be fully seen until closer to 2025.

After 2025, the precautions put in place for COVID-19 will gradually loosen as density requirements are phased out and remote work approaches a long-term trend. Analysts models show that the supply of office space will adjust due to changes in demand that include conversions from office space to other uses.

In the end, the need for social distancing in the pandemic era could cause more demand for office space to reduce workplace density. Conversely, with remote working expected to become more common and long-term, office demand could decline. Due to the offsetting effects of these two trends, most real estate analysts are forecasting only a modest to moderate decline in office demand over the next five years.

Is your business revaluating its office space needs? Whether your company is considering more room to grow or is looking to consolidate and downsize, Metro East Commercial Real Estate is ready to help find the solution to your office space requirements.