While the office market is still booming nationwide, the Mortgage Bankers AssociationThe company’s latest white paper aims to clarify some of the industry’s underlying issues with a focus on the labor market.
Co-authors, Senior Vice President and Chief Economist, Mike Fratantoni, and Vice President of Commercial Real Estate Research, Jamie Woodwell, focus their analysis – A Framework for Considering Office Demand in a Post- pandemic – on a comparison of two contrasting scenarios for a post-pandemic office market.
In one, referred to as the “base case”, hybrid working continues and most workers come into the office two or three days a week at most. In the alternative case, there is a significant return to pre-pandemic conditions, with most workers spending three or more days a week in the office.
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One of the key factors here is whether the labor market remains tight, favoring employees and therefore remote or hybrid work, or loosens up in the near future, leaving employers pushing for more in-person work.
Another dimension explored by Fratantoni and Woodwell is the trade-off between short-term and long-term benefits. The former are more tangible for both employers and workers, while the latter “have so far remained largely theoretical for workers and employers”.
A crucial long-term benefit of increased work in the office is the development of workplace capital, the intangible organizational impulse that arises from interpersonal relationships and communications. The white paper puts it this way: “In-person work builds workplace capital, while fully remote work stunts development and accelerates the depletion of that workplace capital.”
A related item is “proximity bias,” for which the authors cite an April 4, 2022 Forbes article by Joe Du Bey. He defines this as “the phenomenon in which those who are physically closer to corporate leaders enjoy disproportionate influence and opportunities for advancement compared to those who are hybrid or totally distant.”
It comes from everyday things like side conversations that happen when a meeting breaks up, or a manager assigning a task just by looking around the table and seeing who’s there.
The bottom line?
Taking the example of the dot.com crash, the white paper suggests that if the base case (hybrid working remains dominant) occurs, “occupancy rates, net property incomes and values [could] all drop 20% (all else being equal) or more as leases unfold over the next decade.
In the other case, workers would return to the office in greater numbers, in part to avoid missing career opportunities. If that were to happen, there would be a gradual return to something more like the pre-pandemic office market.
But neither the “office market” nor the “demand for offices” is monolithic. The white paper states: “Demand for office space will be determined by the mix and how many – and what types and sizes of businesses – will pursue whom. There will likely be concentrations in approaches by industry, geography, company size and more.
Finally, the future will be neither when it comes to a return to the office, say Fratantoni and Woodwell: “…in either way, we are unlikely to see the office market return to its former shape, size and dimensions. .”