Work-From-Home Movement Pressures Office Properties

The central business district shutdowns that began just over a year ago dramatically increased remote working and pressure on office properties, said Fitch Ratings, New York.

“While previously many office employees had the ability to work from home on a limited basis, the pandemic necessitated it for nearly every CBD office worker, and overall workplace visits are down substantially,” Fitch said in CRE Post-Pandemic: WFH Secular Shift Will Pressure U.S. Office Properties.

“Remote work is viable for most office-using employers and employees, which could have negative cash flow and rating implications for office properties,” said Fitch Ratings Group Credit Officer Steven Marks.

In January, CBRE found 60 percent of office occupiers indicated they are “aggressively pursuing” efforts to reduce space throughout 2021 and 70 percent said they have paused expansion plans given uncertain space requirements. And the Real Estate Board of New York recently found physical occupancy rates in New York offices below 10 percent in January. “Both results indicate a strong commitment, or at least intention, by occupiers to re-examine their space needs,” Fitch said.

Greater flexible-work arrangements will likely weaken office sector fundamentals for the foreseeable future, Fitch said. The ratings firm said it expects rents to remain under pressure as property owners focus on rebuilding lost occupancy from vacancy incurred in 2020 and rising subleased space weighs on rent levels.

In addition, increased use of non-dedicated, flexible office space, sometimes called hot desking, would further decrease demand, Fitch said. “These decisions could ultimately result in higher vacancy rates and increased subleasing that reduces the sensitivity of rental rates to shifts in demand,” the report said.

There could be an even greater impact in the long term as tenants re-examine their multi-year space requirements based on their experience with working from home. “[Occupiers] may opt for a more hybrid and agile work force,” the report said. “Tenants will consider the balance between fewer in-office employees and more space per employee as companies decide to either re-purpose excess square footage toward conference/breakout rooms and other shared space or reduce their space.”