Saving Grace for Office Space?

The recovery in the office property market continues to lag behind other sectors in commercial real estate. But an emerging multifamily trend may offer new solutions for companies seeking greater workplace flexibility for employees.

The remote work era has thrown the office market into long-term uncertainty, with vacancy rates still elevated and rent growth stalled, Lawrence Yun, chief economist for the National Association of REALTORS®, said Wednesday during the Commercial Economic Issues and Trends Forum at the REALTORS® Legislative Meetings in Washington, D.C. Now many companies are leaving traditional business districts in urban centers for more affordable office markets. New York, Los Angeles, San Francisco, and Chicago are seeing the biggest declines in office occupancy, according to NAR data.

But the multifamily sector—which experienced unprecedented growth in 2021—has an answer. Flexible workspace inside apartment buildings and condominiums is catching the eye of investors who see opportunities for residents to continue working from home while still being in a collaborative business environment, said Matt Vance, senior director and head of multifamily research at CBRE. This trend may be a boon to companies that are struggling to evolve their traditional office space, Vance said. “There’s more of a linkage between office and multifamily than ever before,” he added.

Also, with the rise in hybrid work models, employees will spend an additional day or more working remotely compared with pre-pandemic trends. “An average work week with 3.5 days spent in the office would net a 9% reduction in office demand, but that’s if it could happen overnight,” Vance said. “Future economic growth and job creation will have a balancing effect on the impact of virtual work.”

Outside of the office segment, the commercial real estate market is on solid footing, Yun noted. “The industrial sector is booming, retail is turning positive, the hotel industry is recovering, and apartments are doing very well,” he said.

Yun added that the residential housing shortage will result in solid rent growth over the next two years, with apartment rents expected to keep rising by more than 10%.