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CRE Office Pulse, 001

By Rhea M. Stephen, Director of Research

Home from Work is not
Working from Home
Three Recessionary Trends Impacting Office Space Demand

Over the past decade, Chicago’s economic and demographic landscape has dramatically changed. According to a 2019 report by the Brookings Institute, 90% of the nation’s job growth over the past ten years occurred in only four urban cores—of which Chicago was second—and it was predicted this positive trend would continue. Buttressed by the live-work-play model, developers confidently brought 8,000,000 square feet of office space to be delivered into the urban core by 2023. The growth of Chicago’s downtown appeared to be unyielding.

When Covid-19 struck the world, it brought the global economy to its knees. “Health and Wellness” took on a much more literal meaning, replacing the previous feel-good mantra of business culture. In an instant, the whole world changed—upending the Chicago office market trajectory. Subleases flooded the market. Leasing transactions came to a virtual standstill. As employees throughout the developed nations stayed home and worked remotely, a new breed of commentators emerged to declare the office is dead. The facts, however, point to larger recessionary trends beyond a continuation of the work from home (WFH) movement. Like most down markets, this too shall pass.

1. We are in a health crisis-induced recession. During economic downturns, businesses struggle to survive and consequently shed office space as their profits plummet. In the smoke-and-mirrors world of appearances, companies may state they are shedding office space because WFH is working so well, but the reality is they are making a sound business decision to support their current state of affairs.

The graph above highlights the precipitous drop in employment in the Chicago area and across the nation. According to the US Labor Department, more than 53,000 initial claims were filed in Illinois for the week ending October 24—an increase of 6,190 from the previous week. Although most of these claims are a closer reflection of the service economy more than office users (see table below), it is clear employment pain is felt throughout the region. Staff reduction is a clear sign that many businesses are struggling and need to reduce head count and overall office occupancy. During any economic slowdown, it is necessary to cut expenditures—including real estate.

Firms with projected growth, such as Amazon and Facebook, continue their office-occupying plans as they agree to lease and purchase millions of square feet nationally, while also stating employees may continue working from home well into 2021 and beyond. Both firms are confident the future of the office is simply on hold.

As measured by employment and gross domestic product, the recession brought on by the Covid-19 pandemic has been the deepest since the Great Depression. According to Bloomberg’s Corporate Bankruptcy Index, though, this time around appears to be a standard-issue downturn, nowhere near as bad as the recession of just over a decade ago.

2. Recessions erode confidence, and uncertainty breeds inaction. Until a viable vaccine exists, no one knows when business can comfortably return to the office. With potential stay-at-home orders again on the table, it is difficult for businesses to truly know how to pivot and adjust to the current reality. The resulting action is inaction, a corporate wait-and-see. When corporations can resume their strategic growth with a sense of certainty, which includes feeling they can safely bring their employees back to the office, we expect the office market to begin to see activity as pent-up demand can finally resurface.

3. The first casualties of a recession are usually those dependent on discretionary spending—retail, entertainment, travel—and this time is no different. While these industries usually recover, many of these businesses will not survive as the virus continues to spread. In Chicago, the effects on office space are clear. Corporations like Hyatt, United, and Boeing have already announced massive layoffs and space reductions.

Fortunately, Chicago’s economy is not entirely reliant on these industries. In fact, the largest employment sector in Chicago is finance, which still only commands approximately 6% of our economy.

In a study by Oxford Economics, it was predicted that office employment should regain 90% of its 2019 standing by 2022. Although a 10% decline in employment is not ideal, it most certainly is not a doomsday projection for office space demand.

WFH Modality is not
Working at All

At first, the WFH model seemed utopic: work-schedule flexibility, no commuting, and pajama-bottom meetings. Soon, however, we learned that working from home really meant “home from working.” By mid-summer, employers noticed productivity losses across the board, particularly with young associates. Collaboration and innovation dropped off as staff members no longer gathered.1–4 Like the children in our schools, most adults do not thrive in passive, online learning environments.5–7 For employees to make advancements at work, they need to absorb and reciprocate a firm’s values. To have a sense of belonging, employees need a sense of place.

If employed at a single company long enough, Baby Boomer and Generation X employees may already have a specific work culture embedded into their DNA. But what about the less-established Millennial workforce or recent college graduates? How do employers onboard, train, and mentor fresh faces in an online environment? If our children are a proxy for this question, the answer is “not well” or “not at all.”

Working from home is not sustainable. Foregoing office space, or a large percentage of it, will result in short-term cost savings, but employees need to congregate somewhere. Shared space is the glue that connects humans to one another to facilitate learning and innovation.

Discontent with fully remote work—up to 80% on average—began to materialize in the autumn months,7 and we suspect as the school year drags on, these numbers will continue to rise. Once the pandemic is safely behind us, hopefully sooner than later, we believe the reemergence of mental and social welfare will be quietly reintroduced into the nation’s health and well-being matrix. Since March, the nation has been in a holding pattern—indecision reared its head even in the four days it took to call the presidential election. But this too shall pass.

Chicagoland companies will thrive once again, rediscover strengths, and pivot toward success in the new world order. With a clear vision to understanding their goals, local corporations will release the decision-making hold sometime in 2021 or 2022, moving forward with space occupancy plans abandoned during the crisis. In the long run, Chicago employers know this city as a recruitment, innovation, research, and transportation hub for the nation. Those fundamentals will help Chicago’s office market reemerge and display its dominance once again.


References

1. Paltiel, Benjamin. “Zoom CEO Eric Yuan Believes In Big Offices, Pans Hub-And-Spoke Mode,” BisNow, September 2, 2020.

2. Marotti, Ally. “A Shared sandwich at 1871 sparked $100,000 in funding for startup Cameo. Now Chicago tech hubs worry the magic of in-person networking is at risk in a WFH world,” Chicago Tribune, August 20, 2020.

3. Davis, Michelle, Chanjaroen, Chanyaport, et al. “Banks Shedding Real Estate in Moves to Cut Costs: WFH Tracker,” Bloomberg, September 14, 2020.

4. Flint, Joe. “Netflix’s Reed Hastings Deems Remote Work ‘a Pure Negative,’” Wall Street Journal, September 7, 2020.

5. Burke, Lilah. “Moving into the Long Term,” Inside Higher Ed, October 27, 2020. Kokemuller, Neil. “Negative Effects of Online Courses,” Seattle Pi.

6. “Regardless of Background, Online Students Drop Out More Often Than Classroom Counterparts.” Teachers College, Columbia University, July 14, 2011.

7. DeFilippis, Evan; Impink, Stephen Michael, et.al. “Collaborating during Coronavirus: The impact of covid-19 on the nature of work,” National Bureau of Economic Research, July 2020.

8. Survey averages between these sources: Gensler, US Work From Home Survey; KPMG, American Worker Survey; Iometrics/Global Workplace Analytics, Global Work From Home Experience Survey; PwC, US Remote Work Survey; and Hired.com, 2020 State of Salaries Report.