Getting Workers Back to the Office – Not Just a Challenge for Employers
Mitchell Marcus, CPA, and Cecilia Kao, CPA
10.4.22 | Industry Insights
Office occupancy in New York City finally hit 40% in June for the first time since the start of the pandemic. While the rates dipped slightly below 40% during August, they surged to 46% by mid-September, according to the Kastle Work Barometer. For real estate leaders, this milestone is a noteworthy step in the right direction as occupancy levels had dipped to as low as 10.6% towards the end of 2021 due to the Omicron variant. While COVID case numbers are on the decline and certain larger companies, particularly those in the financial services industry — Deutsche Bank, JPMorgan Chase, AIG, and Goldman Sachs, among others — are enforcing stricter in-person policies, many factors still contribute to the low occupancy and vacant spaces in the NYC office real estate market. Which leads to the question, “Where are we heading from here?”
A Changed Office Space Landscape
The COVID-19 pandemic and its many variants have inevitably changed traditional work settings, compelling companies to reevaluate their need for and use of traditional office space. Many companies are still trying to formulate their return to office policy, recognizing that much of the workforce has adapted to remote working over the past two-plus years.
Numerous factors have caused employees to be hesitant about returning to the office, but some of the most common issues include:
- safety concerns regarding commuting on mass transit
- finding and paying for childcare
- personal productivity/efficiency level
- overall work-life flexibility
Many small to mid-size companies remain hesitant to set and enforce strict return-to-office policies which would mandate a certain number of days in the office. These companies are concerned that they might lose employees, some of whom would rather quit and seek employment with an employer with a more lenient policy. This concern is supported by a recent survey from McKinsey, which revealed that among those given the opportunity to work from home one day a week, 87% would take it.
Meanwhile, landlords face the challenges of unleased space, leased but unoccupied space, and a generally gloomy outlook. Approximately 120 million square feet of office space have remained vacant since the first quarter of 2021, and a recent analysis from NYU estimated that by 2029, the city’s office buildings will drop in value by 28%, or $49 billion.
Even before the pandemic, real estate developers would see some percentage of tenants gravitate to the top-of-the-line trophy properties that are newer, close to transit hubs, and fitted with luxury amenities. Now, tenant interest in newer, more amenitized buildings has increased. Many believe that for their employees to leave the comfort of their home office, they will need nicer perks and amenities in exchange. Owners of buildings that haven’t been updated or renovated within the last 10-20 years risk being left behind when compared to newer buildings with the latest features—forcing them to ask themselves the following question:
Does it make sense to invest millions of dollars into a renovation when there is no guarantee of attracting new tenants and with the future of the office market still so uncertain?
Addressing and Adapting to the Amenities Challenges
Many real estate developers and managers are looking into alternative uses for vacant floors of their buildings and/or are evaluating whether to convert their properties entirely to an alternative use. Some are converting vacant floors into event spaces, which can be rented to generate additional revenue and provide existing tenants to use the space for their corporate events. Others are turning their vacant floors into amenity spaces— including fitness/exercise and meditation rooms as well as expanded refreshment areas— in the hopes of retaining existing tenants and attracting new tenants.
However, to truly attempt to counteract the challenges of today’s market, landlords need to go above and beyond just providing basic amenities. For instance, instead of just opening a basic gym in the building, landlords are trying to attract new and existing tenants with higher-end options. These options include full-service sports centers that not only have everything available in a local gym but also feature basketball, volleyball, and pickleball courts. Some landlords are even taking it a step further by inviting their tenants to enter giveaway contests to reward the employees who have returned to the office and incentivizing those who continue to work remotely. Others are showing their tenant appreciation through ice cream socials and similar events and adding perks such as Rentbrella kiosks – a free product for landlords to install that provides free access to an umbrella for the first 24 hours.
A property manager from a privately owned global real estate investment, development, and management firm in NYC describes the current environment as one that requires landlords to be more in tune with their tenants’ current and future needs as well as more aggressive in promoting their buildings and amenities. She states: “Keeping a close relationship with current tenants to learn about their needs and plans for growth is important.
While some companies are looking to downsize space, there are still companies looking to expand, in which case landlords are giving generous tenant improvement allowance to attract lease renewals and new leases. Landlords have also had to increase marketing budgets and social media efforts”.
While landlords are making attempts to help bring the masses back into the office, the onus clearly falls on employers and city policymakers. The property manager stated, “The current landscape of commercial real estate has grown exponentially competitive since the post-pandemic work-from-home model coupled with economic uncertainties. Property owners and managers must offer up as much as they can to retain and attract new tenants. However, contrary to many industry leaders, I do not believe hospitality-driven efforts led by landlords will ultimately drive people back into the office. That level of influence remains in the hands of employers and city authorities.”
The road to bringing office workers back begins with the understanding that the world has changed considerably in the last two-plus years. How employers and employees perceive how office space should be designed and utilized has likely been permanently influenced by the pandemic. The path ahead for the office market will be filled with compromise, innovation, and trends that will unfold as this new reality sets in.
Berdon LLP New York Accountants