Return to the Office
With worker productivity weakening, an increasing number of business leaders are calling for employees to return to in-person work. For as much as remote work has been a boost for some individual workers, working from home may be damaging America’s productivity in aggregate.
The WSJ recently reported that many employers are recognizing these challenges and requiring in-person work: “Some 72.5% of business establishments said their employees teleworked rarely or not at all last year, according to a Labor Department report. That figure climbed from 60.1% in 2021. The survey showed about 21 million more workers on-site full time in 2022, compared with the prior year.” And with the potential for a weaker job market on the horizon, employers may be regaining some leverage over employees.
COLLABORATION IMPROVES PRODUCTIVITY
One standout example is the pivot that Salesforce made over the past year. After the pandemic, its executive team publicly announced the “9-to-5 workday is dead” by giving employees the option to permanently work remotely. A year later, the company saw productivity levels steeply decline. As reported by CoStar in March, the COO made a statement regarding remote work on the company’s earnings call: “Working face to face is a critical component to [Salesforce’s] aggressive focus on profitability and productivity … during the pandemic, we saw productivity drop among our account executives who were working exclusively from home. I believe when our people are together, they’re better learners, collaborators, and networkers.”
While it’s important for the office leasing market when major, multinational tenants make in-person work a requirement, it’s worth noting that in-person collaboration is proving even more valuable for small firms. Crain’s recently cited JLL statistics showing “companies with 150 employees or less are seeing significant use of their offices 3.1 days per week, whereas companies with more than 500 employees average 2.2 days per week.”
OFT-CITED STATISTICS HAVE LIMITATIONS
Cell phone location data provide another important measure of urban activity, and by this metric, Chicago has similarly recovered just over 50% of the pre-pandemic levels, according to the University of Toronto’s Downtown Recovery project. Much like the keycard swipe data, the cell phone data has not improved much year-to-date, suggesting the momentum bringing workers downtown has stalled. Of course, this data has its limits, too, since it excludes River North and material portions of the West Loop/Fulton Market submarket—the highest-growth office markets in the CBD.
With the proliferation of new metrics, traditional measures of office utilization remain valuable tools, but not without their limits. Occupancy and vacancy rates can tell a consistent story over time, and in the case of Chicagoland, both the suburban and downtown office markets are at record-high vacancy rates, almost 30% and 20%, respectively. Yet, as our research has shown, the suburban office market statistics are skewed by large, outdated buildings and empty corporate campuses. In our estimation, when these “zombie properties” are excluded from the statistics, the suburban vacancy rate is in-line with the CBD vacancy rate. Furthermore, suburban product is performing better than the CBD by some metrics, which has important implications for tenants and owners. One of the primary differentiating factors is that the suburban office markets tend to have better commute times and are more immune to quality-of-life issues affecting urban submarkets across the country.
OFFICE UTILIZATION INCREASINGLY STRONG IN CHICAGO SUBURBS
Available sublease space in Chicago’s suburban office market has decreased over the last two quarters, sitting at 3.6 million square feet in Q1/23. Exhibit 1 highlights the change in available sublease space from Q1/18 to Q1/23 for both the downtown and suburban office markets. Over the same period, available sublease space increased 158% in the CBD, but only 64% in the suburbs.
Meanwhile, the sublease vacancy rate in the CBD has grown while the suburban sublease vacancy rate has moderated. As illustrated in Exhibit 2, the sublease vacancy rate trended sideways for several years in both the CBD and the suburbs. Then, coinciding with the start of the pandemic, vacancy rates ticked higher for several quarters. But after peaking in Q4/20, the suburban Chicago sublease vacancy rate plateaued and has started to decline, while the CBD vacancy rate continues to grow—now approaching 2.5%.
FUNDAMENTALS SUPPORTING CHICAGO CBD’S RETURN-TO-OFFICE
Initially, the return-to-office was primarily driven by smaller firms, but now employers of all sizes—in nearly every industry—are following suit. Companies are continuing to right-size their office footprints as leases signed before the pandemic expire. However, in Chicago, there are promising signs for the long-term stability of the CBD:
- Corporate Relocations and Return-to-Office Policies
Chicago remains a major destination for corporate relocations, holding the top spot at Site Selection Magazine for the tenth-straight year. Increasingly, decisions by large companies like Amazon and Blackrock to return employees to the office will help set the precedent for other firms to mandate in-person work. According to Amazon Chief Executive Andy Jassy, “Teams tend to be better connected to one another when they see each other in person more frequently. There is something about being face-to-face with somebody, looking them in the eye and seeing they’re fully immersed in whatever you’re discussing that bonds people together.”
Blackrock’s leadership has a similar view: “At the firm, we enjoy a culture of collaboration and apprenticeship that benefits our clients and enriches the experience of our people. Career development happens in teaching moments between team members, and it is accelerated during market-moving moments, when we step up and get into the mix. All of this requires us to be together in the office. Bringing our people into the room to observe and contribute is how we grow the next generation of leaders and stay ahead of our clients’ needs.”
- Public Transit Use
CTA ridership increased by nearly 25% through 2022, and Metra ridership jumped by 42% in the same time frame. These growth trends were in place well before recent construction on the Kennedy Expressway boosted Metra ridership even further. Though public transit usage remains below pre-pandemic levels, the consistent increase in commuters coupled with higher levels of foot traffic indicate that workers are making their way back into the office.
- Increased Foot Traffic
In Q1/23, Chicago’s downtown pedestrian count almost doubled over the same period a year ago. Interestingly, this has coincided with a surge in parking levels as Metra and CTA are still working to return to pre-pandemic service levels.
- Federal Legislation
The U.S. House of Representatives recently passed the Stopping Home Office Work’s Unproductive Problems Act, which will reimplement pre-pandemic workplace policies at the federal level. This bill is positioned as a response to declining productivity levels since the work-from-home trend began. Federal workers returning to the office could be the first step to bringing government employees of all levels back for in-person work, which could help restore life to Chicago’s struggling Central Loop, where more than 80% of Chicago’s government office space is located. Nearly 60% of all federal employees in Illinois, some 46,000 workers, are based in the Chicago MSA. If these federal policies trickle down to the state and local level, as they are already starting to do, struggling CBDs across every metropolitan area may benefit from the push to bring public sector workers back into the office.
- Google’s Commitment to Downtown Chicago
Google, alongside other major tech companies, has decided to reduce its office space. The tech-giant is expected to take a $500 million loss by closing offices and breaking leases through the first quarter of 2023 as the hybrid-work trend has forced it to reassess its needs for collaborative office space. Even though Google is reducing its overall office footprint, it continues to expand its presence in Chicago with its purchase of the one-million-square-foot Thompson Center in the Central Loop. Chicago remains a top location for growth in the eyes of Google, which cites untapped tech talent and the extensive public transit system as two main drivers of its decision. The fact the company is reducing its footprint nationally while expanding downtown is extremely promising for the local office market.