The COVID-19 outbreak and accompanying move to remote work have impacted real estate. Many firms have rethought their physical workspace needs as workers work from home. This has reduced demand for traditional office space and increased demand for co-working spaces. Some commercial real estate developers have had to focus on residential properties or retrofitting office buildings for hybrid work environments. This comprises specialized workstation locations, social distancing techniques, and increased cleaning processes for in-office and remote workers. Hybrid work settings have affected real estate development. With the option to operate from anywhere, corporations may seek properties in lower-cost places, changing real estate values and development patterns.
According to the 2022 Accenture report, 68% of fast-growing companies have adopted a hybrid work model, and more than 83% of employees prefer it. Although the hybrid workplace model has been around for some time, it increasingly became common during the pandemic because of the lockdowns.
Inevitably, the real estate market is changing in response to the evolving trends in office attendance and the widespread belief that hybrid working models are here to stay. Here’s a look at the impact of a hybrid working environment on the real estate industry and how investors can adapt to its changing demands.
Impact of Hybrid Work Models on the Real Estate Industry
Reduced Demand for Office Space
It is no secret that the widespread adoption of hybrid work models has revolutionized the commercial real estate market. According to a report from CBRE, demand for office space fell in September for the fourth month in a row as occupiers delayed lease decisions.
One of the reasons for the decline is evaluations of hybrid working arrangements by companies. Some organizations may also reduce the size of their workspace due to underutilization.
In addition to catering to employees’ interests in working from home, many companies realize they can make substantial savings by minimizing office space.
Reduced Market Value for Commercial Spaces
A working paper by experts at NYU and Columbia warns that the value of commercial real estate across the country could drop by as much as $500 billion from its pre-pandemic level by 2029 if current trends in working from home don’t change.
The locations of both workplaces and residences significantly impact real estate values and development. When there is less demand for office space, the lease income that the building generates decreases, and so does the building’s market value.
That’s a disaster for commercial space owners, equity investors, and lenders and may lead to bankruptcy and foreclosures.
Increased Demand for the Residential Real Estate
After companies started adopting hybrid working environments, many employees considered moving out to the suburbs, rural areas, or smaller towns because of preference and the high cost of living in the city.
As people no longer commute to and from work daily, there’s no need to live close to a place of employment or a public transportation hub and incur high costs of living. That has led to a dramatic increase in the demand for suburban real estate, which may cause a rise in average prices.
What can Real Estate Investors do?
Low occupancy is costly and may render your office building redundant if you do nothing. That said, you can optimize your property in a few ways to help attract occupants, increase demand, and enhance tenants’ satisfaction.
Repurpose Existing Buildings
Office space is becoming obsolete due to the rising popularity of home office workstations. Overbuilt office buildings in areas where property values are declining, vacancy rates are growing, or places far away from public transit are particularly at risk.
RentCafe believes that in 2020 and 2021, 41% of apartment conversions resulted from previously used office space. Investors whose assets are in this position may find that converting their property into residences is their best choice to avoid foreclosure.
Integrate Home Office in Living Spaces
Recent 1-year estimates from the American Community Survey (ACS) by the Census Bureau show that the number of persons who work from home increased from 5.7% to 17.9% between 2019 and 2021.
The necessity for several home offices to support two or more persons working from home has expanded in recent years. Investors can introduce a home office idea tailored to the specific requirements of people working from home. Adding a space specifically for work can drive up the price of new houses and raise the value of existing ones.
Open Data Centers
Companies used to host their private networks and resources locally. However, companies are recently shifting their IT operations to data centers to reduce the need for expensive commercial real estate while improving their IT assets’ performance, reliability, and cost-effectiveness.
Further, the need to securely store and share data among employees who spend time in and out of the workplace has prompted businesses to explore new solutions to accommodate mobile workers.
Hybrid work may cause a surge in demand for data centers, which would be good news for investors in the sector. One thing that is certain about cloud, colocation, and managed data centers is that their global relevance will grow with the speeding up of digitalization.
Research and forecasts indicate that the co-working space industry will grow by 11% annually ($13.35 billion) between 2021 and 2025. In reality, not everyone can work from home. To make use of time when they don’t have to be at the office, employees who need to clock in a few days a week of office time may look into renting a shared office.
After over two years in business, 72% of co-working spaces reported a positive financial return. That bodes well for real estate investors who put money into shared office spaces.
Landlords rarely signed short-term leases in the past because it was easy to find new tenants prepared to commit to longer terms. The economic situation is not as rosy at the moment. Currently, landlords are eager for any kind of tenant they can get, as many experts believe it will be years before occupancy rates return to pre-pandemic levels.
Companies that wish to keep a physical office presence but are still unsure about their long-term needs often opt for flexible lease terms. You can increase your office space occupancy by providing shorter lease periods, cooperative rates, and adaptable layouts.
There is little question that the hybrid working model is here to stay. However, this may not inevitably indicate a sharp downturn in the real estate industry. It is essentially an opportunity for the sector to adapt in response to consumer and market demands. Real estate leaders must conform to the shifting preferences of their customers by offering fresh, cutting-edge products and services.
By Gurpreet Singh Padda, MD, MBA