Hybrid Work and Real Estate

Prior to the pandemic, the number of hybrid workers – workers who work parttime from home and parttime in the office – had been doubling every 15 years.  Since March 2020, the number has tripled, the equivalent of 50 years of change in just two years.  A 2021 randomized study by Stanford Professor Nick Bloom – who has been researching working from home since 2014 – found that hybrid workers were 8% more productive than fulltime office workers and less likely to quit.  Managers, many of whom were initially reluctant to adopt hybrid work, are now incorporating hybrid work into their long-term strategic plans.

One effect of this trend is a reduction in the need for office space and a corresponding increase in the need for home-office space.  According to brokerage firm JLL, office leasing in major cities was down 40% in the third quarter of 2022 from pre-pandemic levels.  A recent analysis by NYU and Columbia University, aptly titled “Work from Home and the Office Real Estate Apocalypse”, estimates that U.S. office values could fall 40% (or $453 billion) as a result of remote work.

The decline in office occupancy is also affecting retail sales, especially in central business districts, where lease revenues for retail properties are falling.  The decline in office and retail values will eventually affect tax revenue.  In New York City, for example, 53% of the City’s 2020 budget came from real estate taxes and 24% from office and retail property taxes.  As both sectors decline, the resulting fiscal hole will need to be filled through a reduction in services or increase in tax rates, potentially exacerbating the already fledgling demand for urban office space.

On the other hand, many apartments are now functioning as parttime offices, increasing the demand for housing by hybrid workers.  Similarly, hybrid work played a role in the record home price appreciation experienced over the past two years with some experts attributing up to 50% of the appreciation to work from home demand.

The future of office demand is intimately dependent on the future of U.S. companies’ work-from-home policies.  The beneficiaries will likely continue to be suburban apartment owners and homeowners, whose properties will see increased demand as workers spend more time at home and are willing to live further from the office.

Roommates on the Rise, Historic Rent Growth Slows

As the U.S. eased out pandemic-related lockdowns in 2021, renters returned to urban markets in droves, causing an unprecedented spike in rental housing demand. The increased demand pushed rents up 25% over the past two years.  Many renters were priced out and forced to seek alternative solutions including roommates and moving in with family.

A recent UBS poll found that 18% of renters stated that they lived rent free with friends or family during the past six months.  According to a Pew Research study, one in four young adults lived with their parents or another older family member in 2021, the largest share in more than 50 years.  The proportion was higher, about 33%, for those without college degrees.  And the surge in roommate demand is not limited to young renters – SpareRoom documents that the number of seniors and baby boomers living with roommates is growing at twice the pace of any other group.

This trend, combined with ongoing inflation, has recently slowed the previously red-hot rental market, with demand hitting a two-year low in the third quarter of 2022.  Vacancy rates also increased 8%, from 5.1% to 5.5%, between the second and third quarter.  As a result, multifamily operators are adjusting their business plans and reducing rents – or keeping them flat – to shore up occupancy as they approach the slower winter season.