The debate between remote work, hybrid work, and returning to the office continues in our post-pandemic world. Some companies have required employees to return to their desks. Others have accommodated employee requests and offered greater flexibility. Some have actually been forced to allow some degree of remote work because of talent shortages. But no matter what one’s perspective may be, there has been one major repercussion: empty office buildings. Throughout the world, major cities are facing dilemmas on how to handle the notable decline in office building occupancy. And thus far, there hasn’t been an easy solution to the problem.
For the most part, most countries have reopened and have relaxed pandemic requirements. China and a few others may be the exception, but the vast majority have returned to life as normal. As such, it might be expected that returning to the office in-person would follow. But the benefits of remote work for both employee and employers have caused many companies to rethink things. One of the aspects of these new work dynamics that deserves attention pertains to office real estate. Notably, the choices made today have some short-term effects. But long-term considerations must also be taken into account should work trends shift.
“There’s no part of the world that is untouched by the growth of hybrid working.” – Richard Barkham, Global Chief Economist for commercial real estate firm CBRE Group Inc.
Empty Office Buildings – A Global Problem
If one tours major cities in the U.S. like New York, Atlanta, or Chicago, the impact of remote work is noticeable. Traffic congestion is slightly less, especially some days. Foot traffic around downtown centers has reduced. And office building lobbies are much less crowded. But these developments in a post-pandemic world are not only occurring in the U.S. In fact, major urban cities across the globe are experiencing partially empty office buildings. While there have been many workers returning to the office as of late, many now work hybrid or remote schedules. As a result, vacancy rates have significantly increased in downtown office centers.
According to some recent statistics, New York has a vacancy rate of about 15% in its existing office complexes. Hong Kong has about the same percentage while London reports a vacancy rate of 10%. Many companies having realized the advantages of remote work have opted to downsize their space or relocate. And unfortunately, these moves have left partially empty office buildings in their wake. While it might seem intuitive to simply repurpose these buildings for other uses, barriers exist. And these same buildings are too new to be demolished or torn down. Cities are thus in a holding pattern waiting to see whether returning to the office might be an eventual trend.
“In this environment, you can be in a lot better building in a better location at a similar rent.” – Richard Litton, President of Harbor Group International
An Evolving Urban Dilemma
Empty office buildings pose serious problems for most cities. When it comes to municipal revenues, office centers generate a substantial amount of taxes. In fact, between 6-7% of municipal revenues typically come from major office buildings each year. These tax dollars are used to fund school systems, police departments and firefighting personnel. Therefore, many cities are feeling the pinch given recent developments. While city planners still hope that returning to the office will save the day, short term pressures are mounting. Solutions to replace these lost sources of tax income are few and far between.
Lost tax revenues are not the only issue these cities are encountering. Partially empty office buildings mean less foot traffic within urban centers, especially in business districts. This reduction has culminated to the closure of many businesses that relied on passersby. Numerous cafes, flower shops, dry cleaners, and other such companies have been forced to shut their doors because of this. Not only does this bode poorly for business economies but it further reduced municipal tax incomes as well. Unless returning to the office trends pick up, it’s unlikely these once-occupied spaces will again host local businesses.
“It’s still early to tell what the structural change will be in both the economy and working and commuting. But clearly, the city is facing some short-term challenges.” – Ana Champeny, Vice President of Research at the Citizens Budget Commission
Potential Solutions to Consider
Obviously, having workers returning to the office would be the easy solution to the problem. But this appears to be unlikely for the immediate future. Low unemployment rates below 5% and a shortage of talent means workers are dictating terms of employment. The vast majority according to research polls prefer remote work overall. Therefore, cities must explore other options in dealing with empty office buildings. Of resolutions considered to date, repurposing these buildings or demolishing them appear to be the main options. However, neither is cost-effective to pursue of the nature of the buildings themselves.
Unfortunately, most empty office buildings today were built between the 1950s through the 1980s. These structures are too old to modernize without substantial costs. Compared to older buildings in the early 20th century, these newer buildings have larger spaces. That means converting them into residences would not be ideal and would underutilize existing square footage. At the same time, zoning restrictions and architectural challenges are common, which also make repurposing costly. And because most of these buildings have significant value, tearing them down makes little sense. Thus far, an ideal solution to the problem hasn’t been found.
The Future of the Office Building
Without question, dealing with empty office buildings is a major challenge in the aftermath of the pandemic. While returning to the office may be desirable from this perspective, the likelihood that this occurs is small. Many experts believe remote work is here to stay because of its advantages and advances in technologies. Therefore, the future of existing office spaces remains unknown at present. Ultimately, however, push will come to shove, and office owners and cities will need to collaborate on a plan. City incentives, relaxation of zoning rules, and other accommodations are likely to be discussed. But waiting for those returning to the office in-person isn’t recommended. The wait may be quite long if not indefinite.