Hybrid Work and the Future of Office: Adapting to a New Paradigm in Occupier Demand

By: Emil Malizia, Ph.D., CRE, Shawn Moura, Ph.D., Dustin C. Read, Ph.D./J.D., Jessica Morin and Julie Whelan

The widespread adoption of remote work during the COVID-19 pandemic is reshaping occupier plans for office space. Many observers initially expected the pandemic to be an acute short-term problem for the office sector that would end with demand looking much like it did in 2019 once the public health emergency was over. However, the emergency phase of the pandemic lasted much longer than most expected, allowing time for both workers and their employers to adapt to new work patterns. Hybrid work emerged as a common approach to safely transitioning employees back to in-person work, but it has since become the norm in many office-using industries.

The NAIOP Research Foundation commissioned this report to examine the current state of hybrid work and how it affects the office sector. The study draws from survey and market data provided by CBRE to explore how occupiers are approaching their use of office space, and the building locations, features and amenities they prioritize. These data also provide insight into the factors contributing to functional obsolescence in the buildings that have seen the largest increases in vacancy rates. The authors interviewed commercial real estate professionals to examine how developers, owners and operators are responding to current market conditions. Findings from this report include:

• Although the expansion of hybrid work schedules has accelerated a decline in the amount of occupied office space per worker, there is greater demand for shared meeting and coworking space that allows occupiers flexibility to accommodate more employees on busier days. Many are willing to pay for these spaces on a per-use basis or through a provision in their leases.
• Many occupiers are trading quantity for quality, preferring smaller office footprints in conveniently located modern buildings with amenities that will draw workers to the office and improve productivity.
• Occupiers are looking for buildings that make commuting easier, with ample parking, access to public transit and onsite amenities. They also increasingly prioritize sustainable design features and access to outdoor space.
• Office use is likely to grow, with 38 percent of occupiers indicating they expect utilization to increase and 60 percent indicating that utilization has stabilized.
• One tenth of U.S. office buildings account for 80 percent of the overall increase in vacancy since the first quarter of 2020. These commodity buildings tend to be in high-crime areas, lack access to amenities, and are concentrated in markets that have been slower to return to the office. Other commodity office buildings are performing better than the average vacancy rates would suggest.
• Only a small proportion of the most functionally obsolete office buildings are good candidates for extensive renovation or conversion to new uses. Current tight lending standards, higher interest rates and higher construction costs have made many rehabilitation and conversion projects cost-prohibitive, absent public subsidies.

 

Produced in conjuction with CBRE.

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