Pandemic Occupancy and the Hybrid World

Real Estate

Just months before the onset of the COVID-19 pandemic, Withum discussed the future of coworking spaces in a world with or without WeWork. WeWork was the largest New York City tenant in 2018 and increased its square footage by more than 700,000 in 2019. Subleasing and hoteling were ideas on the rise as brokerage houses offered coworking office space and companies attempted to reduce fixed costs to improve operational margins as a result of the WeWork model.

Now, more than two years later, Withum and the rest of the world are looking at a completely different landscape as we continue to navigate this pandemic. According to Computerworld’s November 2021 article The future of work: In a hybrid world, office downsizings are coming, corporate office leasing remains lower than pre-pandemic levels. Data from Jones Lang LaSalle IP (JLL), a commercial real estate and investment management services firm, November 2021 report shows that through the third quarter of 2021, leasing volume in the United States increased 39% compared to 2020. However, this 39% still places corporate office leasing 25% lower than it was after the third quarter of 2019. COVID-19 had a greater impact on the US leasing market than the Great Recession of 2007-2010. More than 138 million square feet of office space was vacated in March 2020, which greatly trumps the 103 million square feet vacated during the Great Recession. Companies were optimistic for 2021, but with what seems to be a never-ending pandemic, more shutdowns and return to office polices have been delayed into the early months of 2022. At this point, companies are further evaluating if they need to keep all their office space or downsize.

The hybrid work model, which was already a trend in 2018-2019, is now becoming the new normal. As late as May 2021, just 1 in 20 office buildings in the country had 10% or more of occupancy. This same statistic for late third quarter only increased to 16%. The forecast for 2022 is showing that 1 in 5 office buildings are expected to be completely vacant. These figures cast a shadow on the office leasing market, but employers are hopeful for a comeback. Major companies such as Google and Microsoft have already started to adapt their current spaces to be more advantageous for a hybrid workforce. For example, Microsoft installed eye-level cameras and screens on the walls of its conference rooms so that in-office colleagues can maintain eye contact with out-of-office employees. In warm weather locations, outdoor spaces are becoming more popular. Nevertheless, many companies do not have the means to transform spaces within their offices, thus entering a new year utilizing existing resources.

Now that companies are trying to reduce vacant space such as unused offices and cubicles, the subleasing market is on the rise. A Cushman & Wakefield report found that the cost of subleasing office space can be anywhere from 10-50% cheaper than renting. Most companies were obligated to implement a work-from-home model in 2020 and found many successes in this new structure. In addition to subleasing, and with employees slowly starting to come back to work on a hybrid schedule, hoteling is now becoming a very popular method of occupying whatever space remains.

This pandemic has pushed employers to adopt new methods of working to accommodate the current landscape across the country. Industries of all sizes and types have implemented subleasing and hoteling successfully and will continue to do so into 2022.

Author:Joseph Boccia, CPA, Senior Manager |[email protected]

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