Written By Shayna Korsh
Since the onset of the COVID-19 pandemic in March of 2020, millions of Americans were forced to quarantine in their homes and limit all nonessential “in-person” activities. For many, this included traveling to work. Though the shift to remote work was initially a temporary measure to reduce the spread of the virus, many employers are recognizing its benefits and may maintain this remote style of work even after the pandemic ends. A permanent shift to a remote workplace would ultimately have drastic effects on the demand for commercial real estate and would continue to drive prices down.
With the lack of employees coming to work, office space remains empty. Most companies are currently locked into their long-term rental leases; it would not be surprising to see some firms forgo a renewal of their space. For example, according to the New York Times, the CEO of JPMorgan Chase, Jamie Dimon, wrote in a letter to shareholders that remote work “would significantly reduce our need for rental real estate” (Eavis and Haag). Other large corporations are likely to follow JPMorgan Chase’s lead. Dimon also estimated that for every 100 employees, the firm may only need office space for about 60, on average (Eavis and Haag). Whether JP Morgan Chase plans to rotate its employees or completely eliminate some workers from going into the office altogether, it is obvious that Dimon is anticipating a significant change in the firm’s workplace environment.
Since office buildings are often located in the center or downtown of a major metropolitan area, employees not commuting to work could have significant effects on other important aspects of downtown life. For example, restaurants, bars, and other entertainment venues may have incentives to migrate from their current, central locations. On top of the pandemic’s effect on the valuation of commercial real estate, it also may result in a reduction in vibrant downtown areas. Some restaurants or bars may not be able to remain open without a reliance on consistent customers, which are the city’s commuters.
Prices are high when commercial real estate is scarce and low when there is too much empty space. Due to the pandemic, demand for office space is extremely low, so this makes commercial real estate widely available, and this results in a price drop.
Even though some corporations are currency shifting away from an in-person office setting, others still plan to embrace it. “Tech companies including Amazon, Facebook, Google, and Apple, have added office space in New York City during the pandemic” (Eavis and Haag). These tech companies are buying up office space at a time where supply is high and demand is very low, making it very cheap relative to its typical market. For example, in Manhattan, according to the real estate services company Newmark, roughly 17.3 percent of office space is available, and asking rents have dropped to around $74 per square foot, from nearly $82 at the beginning of 2020 (Eavis and Haag). These tech companies seem to embrace the in-person workplace environment because of an emphasis on teamwork and collaboration, yet their office expansions are also a strategic move since they are occurring at such a cheap price.
It is still too early to definitively predict how companies will react to a waning commercial real estate market. While some firms like Amazon are seizing on these cheap rental prices, others remain hesitant due to the continued uncertainty of the pandemic. After already working remotely for over a year, it could still be several more months before the majority of the American population is vaccinated. The transition back to in-person work will undoubtedly need to be slow and systematic; it could be several months before that process is completed. Kastle Systems, a security company, reports that “Just a quarter of workers in the ten biggest urban areas have returned to offices, a rate that has stayed mostly the same for months” (Eavis and Haag). Until companies have a better understanding of how the pandemic will progress, the best strategy may be for businesses to wait until some form of normalcy before buying up more property.
Corporate America was already slowly shifting to a remote workplace environment due to innovations in technology, and the COVID-19 pandemic seemed to be the catalyst for the movement. The drastic shift to remote work has led to a lot of speculation within the commercial real estate market, as prices continue to fall and office spaces are vacant. The future of metropolitan downtown areas are also in question without the consistency of workplace commuters to prop up demand for businesses like restaurants, bars, and entertainment. Until the pandemic ends, the future of the American commercial real estate market and the overall workplace environment will remain uncertain.
Works Cited
Eavis, Peter, and Matthew Haag. “After Pandemic, Shrinking Need for Office Space Could Crush Landlords.” The New York Times, The New York Times, 8 Apr. 2021, www.nytimes.com/2021/04/08/business/economy/office-buildings-remote-work.html.