Companies desperately need their employees' help to justify their office lease payments, although studies show employees prefer the luxury of working from home. As a result, some enterprises have gone fully remote, while others mandate full-time in the office, and others have adopted hybrid schedules. This poses a considerable threat for office landlords, as their physical vacancy is much greater than their financial vacancy. According to Cleveland Hill, Atlanta's office vacancy rate of 20% isn't terrible compared to national averages, but the underlying problem lies within occupied space. The "occupied space" is likely 60% vacant, with most employees still working from home. The Census Bureau reported that from 2019 to 2021, the number of employees on a hybrid work schedule has tripled. To compound the problem, a vast amount of CMBS debt is coming to maturity in 2023. Trepp reports that $16B will come to maturity in New York City, $4.2B in Chicago, and $3.8B in Los Angeles. Putting office landlords are in a tight spot as they look down the barrel at a significant balloon payment and a dramatic fall in cash flow as many tenants decide to downsize or forgo their renewal altogether. So how does the landlord come out of this on top? We connected with Cleveland Hill, the Senior Business Development Associate at Colliers Occupier Services, to get his insight on how office tenants navigate this transitional period.
Empty seats are not the main concern for C-suite business leaders because they recognize that productivity and team synergy are declining. Additionally, managers need help tracking productivity; a Microsoft study found that only 12% of leaders have confidence in their team's productivity level. No matter how many videos calls you make with your team, the same level of camaraderie established in person is hard to achieve. The support from your team is different when you close a big sale; unfortunately, a congratulatory message on Slack doesn't carry the same substance. Hence why many companies are opting for a hybrid work schedule or moving offices into flex space, Hill explains. Instead of renewing their current leases, businesses are cutting costs with flex space. Since workers are only in the office a few days a week, costs are significantly reduced because the rates can depend on the number of employees utilizing the space or a traditional subscription model. Companies benefit both from increased team productivity and a decreased expense on rent. Proactive landlords have recognized the shift and are hastily converting inventory into flex space.
Microsoft's study also concurred 73% of employees need a better reason to go into the office than just company expectations. Since Hill and his team work with executive decision-makers daily, we asked what the most common strategies C-Suite individuals are implementing to encourage the return to the office are. First, Hill explains there is a flight to quality. Employees prefer to work in a modern, comfortable workplace—new or revamped workspaces commonly include common areas, cafes, and gyms. In addition to the new environment, companies are offering catered lunches, pet stipends, additional PTO, and commuter benefits. Yet, there is another problem Hill brings to our attention; companies are struggling to land the best talent. The most talented professionals are demanding to work from home, and since talent is so scarce, companies have no choice but to oblige.
There is another problem Hill brings to our attention; companies are struggling to land the best talent. The tightened labor market for the past few years has given power to the employees. The most talented professionals are demanding to work from home, and since talent is so scarce, companies have no choice but to oblige. The narrative is shifting as companies foresee a downturn in economic growth and have begun to reduce job postings and increase lay-offs. Except to see more companies yield the threat of lay-offs to incentive a return to the office. Elon Musk notably utilized this tactic to incentivize Tesla's employees to return to the office, and it worked. But where the market goes is still a toss-up. Expect major adjustments in price and demand over the next few years as employers and landlords hash it out.
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