The Effect of Hybrid Work on Commercial Real Estate

The global pandemic unleashed massive tectonic shifts in the commercial real estate sector. The glass tower in a prime location is no longer a product that’s in high demand. Office occupancy still sits below 50%. While close to $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025.

The commercial real estate sector has been significantly impacted by the pandemic, with reduced demand for high-end office spaces leading to concerns about funding and refinancing. The challenge is compounded by spiking interest rates and economic uncertainty, which paint a gloomy picture of the future of the sector.

If we also take into consideration the preference for “working from home” for most knowledge workers across the world this begs the question – “Why should we care about these landlords and their fancy high-rises?

Why should we be concerned about the future of Commercial Real Estate?

The unpleasant truth – your retirement funds can be impacted by this, as well as your local bank. When a real estate developer wants to build or purchase a commercial property, they typically get a loan from a financial institution. These loans are often packaged and sold as commercial mortgage-backed securities (CMBS) to investors, including pension funds, insurance companies, and mutual funds. In turn, these investors often market their CMBS shares to retail investors, such as individual investors or through retirement plans.

What this means is that a significant portion of the average person’s investments may be indirectly tied to commercial real estate debt. This is particularly true for regional banks, which are often the biggest lenders to office developers and hold a significant amount of commercial real estate debt on their balance sheets. Depositors at these banks may not realize that their money is being used to finance commercial real estate projects, which means that a downturn in the commercial real estate market could impact their investments and savings.

So, it turns out that the seemingly disconnected worlds of the landlord & the average employee actually have an intersection. Nowadays landlords depend on employers for their survival and employees depend on the survival of these landlords for their precious portfolios and retirement accounts. Cooperation between both parties won’t be easy – landlords will have to admit that their “product” is outdated and they need to start listening to their tenants a bit more. Employees will need to be honest with themselves and admit that working entirely remotely might not be “the best thing ever” and it might be useful to have a place to meet from time to time.

Having this in mind let’s dig a bit deeper into some more conclusive research about the impact of remote work on productivity and figure out if there is a way for both parties to work together towards a more sustainable and successful future.

Work from Home vs Work from an Office vs Hybrid Work

We’re experiencing some very polarized opinions about whether we’re more productive at home vs. the office. Managers and employees are having very contradicting thoughts on that matter. The friction between executives and individual contributors is escalating. Before we jump to any conclusions, let’s explore the hard data and strong research!

Related read: Office Move Checklist for 2023

It’s important to note that the research articles are suggestive and not conclusive. We need a lot more data to fully understand the multi-layered effects of working in different setups on productivity and company success over long periods of time. However, it’s a very good start.

Individual performance

To start off, Working from home can bring an average of 13% productivity gains to individual contributors’ performance. There’s a but though. It works well for roles that can be easily managed and measured and require less intensive communication with peers and managers. The link between effort and performance should be very direct. An important prerequisite is that team managers could generate a report of the performance of the team members daily and easily detect problems in individual employees’ performance. Good examples of these are customer support and client services roles.

Note: Read the Stanford research here.

On the other hand, the overall productivity of individuals working from home can degrade by 8-19% for positions that require intense communication and alignment. Good examples are engineering, product development, marketing, HR, and others. Despite that the overall output at home is comparable to the output that we can produce in the office, the research points out that we actually work a lot more at home (2h+) in order to achieve the same output. Therefore, productivity actually declines. The research suggests that the decrease is due to increased distractions and coordination costs.

Furthermore, employees with children at home had a greater decline in productivity than those without, but even those without suffered significant productivity losses. Women were more negatively affected by WFH than men, but this gender difference was not due to the presence of children in the home. The researchers suggest it might be due to other demands placed on women in the domestic setting while working from home.

Employees with lower company tenure decreased output slightly more during WFH, whereas output remained about the same for those with longer tenure. This suggests that employees who are more adapted to firm culture and processes are better able to work remotely, where there is no colleague at the next desk for quick help or advice. As a separate effect, those with greater career experience increased hours worked during WFH more than those with lower experience, with no effect on productivity. This suggests that more senior employees, with greater managerial duties, spent more time coordinating during WFH.

Note: Read the full research here.

At the same time, Hybrid models don’t show a statistical difference in individual performance when compared to full-time work in an office. Despite that on average, people work 2h less at home compared to the office, the average output remains the same. The research suggests that people overcompensate by spending more time working on so-called office days.

Note: Read the full research here and also don’t miss our article on the top hybrid work statistics as of 2023.

Attrition Rates & WFH as Employee Benefit

All available research clearly concludes that WFH options (whether that’s full-time or hybrid) are perceived as a huge employee benefit. Most employees value it so much that they’d rather receive a 4-8% pay cut but keep an option to work from home.

Employees reported working from home afforded them the flexibility to attend a dentist appointment, pick their children up from school, exercise, or travel to their hometown early on a Friday. This matches the survey evidence from the US that the second-largest benefit of working from home is flexibility (the largest is avoiding commuting).

Furthermore, the option to WFH full-time or work in a hybrid setup clearly reduces the so-called regrettable attrition rates by 50% for full-time WFH and 33% for Hybrid. These are staggering numbers and clearly outline one of the biggest benefits of hybrid working. Most organizations spend enormous amounts of effort and resources on hiring, training, and onboarding employees. Reducing the attrition rates by 1/3 can have a massive financial impact on most organizations.

It’s important to note that the attrition rates depend very much on other factors such as gender, tenure, and experience so it’s important to be flexible when we build our hybrid work policies. For example, new employees should spend more time in the office with their mentors and managers so they get onboard quicker.

Company/Startup Growth

Another recent internal research done by a VC company showed that on average, early-stage startups with an office presence grew more than 3x faster than those working entirely from home. To be more specific, pre-seed and seed startups with an office space grew 231% vs. 67% working entirely remotely. Furthermore, later-stage companies’ (post-Series A and B rounds) growth is still better with office-based companies but not as shocking as in the early stages.

As a startup founder that’s been through all these stages, I can actually relate to these numbers. The earlier stage your company is, the more you need the emotional support you can get from your team members in a physical environment. It just feels great to see all your buddies cracking customer problems sitting next to you. Of course, communication can be truly instant. Then you can celebrate the successes, share experiences, go for a drink on bad days, etc. It’s hard to imagine starting a company in a truly remote environment.

At the same time, as the company grows and matures, the reliance on physical proximity subsides. Therefore, the impact of having an office presence on growth might be less impactful.

Note: Read the full report by Steve Blank (the father of the Lean startup) here.

If there’s anything I learned from reading all these research papers and industry reports is that there’s no single silver bullet for how your organization should work.

You should find the level of flexibility that works for you!

The Future of Commercial Real Estate

One thing is clear though – work from home is here to stay – in one form or another.

The office is here to stay, too – in one form or another.

Whether we call it hybrid work or something else, it’s clear that employees and organizations need a lot more flexibility.

Flexibility + high unpredictability means less long-term committed space. A lot less. It also means more flex space. A lot more. That’s why we’re seeing very clearly:

• The rise of suburban flex and coworking spaces – we expect to see accelerating trends of expanding suburban spaces that are fresh, cool, and local. These spaces offer an amazing work experience to customers.
• The decline of downtown fixed-term offices – we expect to see an accelerating trend of declining interest in downtown offices offered as long-term leases. The trend is especially hard on lower quality and older buildings while the top quality buildings with strong ESG focus remain in high demand.

The FlexIndex Apr 23 clearly shows that the flex space industry has fully recovered to the pre-pandemic levels and is ready to grow.

The math suggests that we will see less demand for the more traditional, long-term office space. Therefore, we expect to see a lot less interest in refinancing these projects, thus imminent defaults.

At the same time, we expect to see a lot more investment in flex and coworking spaces that are closer to where people live.

Will Landlords and the underlying financial institutions change fast enough and adapt to the new reality? It’s in our own interest that they do.

At OfficeRnD, we’re here to help and support you in your quest to deliver better and more flexible products to tenants and employees. Read more about the different tools and techniques you can use to make your buildings more flexible!