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20% of Companies Plan to Downsize Office Space


Apr 14, 2021 by Maurie Backman
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When the coronavirus pandemic first happened back in early 2020, a lot of companies were quick to shift their employees to remote work -- and many employees assumed they'd be holed up at home for a few weeks until things blew over. Fast-forward more than a year, and a large number of companies still have the bulk of their staff working remotely.

For some people, remote work has been a mixed bag. But it's also a setup a lot of companies are just plain used to at this point. As such, many employers are making plans to keep their staff remote for the long haul, while others are looking at hybrid setups that would have employees working from home for part of the week but coming into the office the rest of the week.

All of this is causing employers to reassess their office space needs. And in a recent survey by the American Institute of CPAs, more than 20% of company executives expect to reduce their office space in the coming year.

But while this news shouldn't come as a shock, it's not what office building landlords want to hear. And if the trend of shedding office space gains traction, office REITs (real estate investment trusts) could really end up struggling for years to come.

Can office buildings recover?

There are several factors working for and against office buildings at this stage of the pandemic.

First, the positive. Vaccines are becoming increasingly available by the day, and by late April, every U.S. adult who wants one should be eligible to schedule an appointment. The more people who get vaccinated, the more likely the coronavirus outbreak is to slow down. And that could, in turn, eliminate one major safety concern that's been keeping many employers from bringing staff back to the office.

Another factor that's apt to help offices is restlessness. A lot of people who are stuck doing their jobs remotely want to get back to the office and are willing to give up the convenience of working from home if it means getting to interact with others and not having to stare at the same set of walls day in, day out.

On the other hand, the success of remote work to date is apt to hurt office buildings. Though some major companies have already gone out on a limb and declared that remote work will not be their new normal, the reality is that a lot of businesses are doing well with it -- and if they can reap some cost savings by not renewing leases or dumping office space, why not?

Another deterrent to office buildings' recovery is that most companies can't just retain their existing setups. Rather, they'll need to make an effort to employ social distancing measures and implement thorough cleaning procedures to make workers comfortable with the idea of getting back to in-person employment. That's an added cost employers will have to absorb, and they can't assume their landlords will pick up the tab in its entirety -- or even at all. As such, some companies may opt to stay remote because it's easier in many regards.

Should office investors give up hope?

Chances are, the majority of office buildings won't recover this year, and possibly not next year either. In fact, it's too soon to make predictions on when leasing activity will pick back up because for a lot of companies, the first number of months of in-person work will likely be trial and error. But while the news that many companies are planning to downsize isn't great for office REIT investors, we don't know what the future holds.

Also, the hybrid models many companies plan to employ may end up being more cumbersome than anticipated. In some cases, making space for everyone may end up being an easier thing to pull off logistically than having workers take turns using limited space.

As such, office REIT investors should proceed with caution, but they shouldn't necessarily assume that the sector won't recover at some point.

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