Which Way To Run? Decoding The Wobbly Economics Of The Office Market


There is rising hybrid work preference (51% may quit if revoked), yet CEOs push the office return amid economic uncertainty and potential real estate crisis.

  • Hybrid work is the current trend, with many employees preferring to keep this arrangement, creating uncertainty about the future of office spaces.
  • Economic indicators suggest a mismatch between the supply of and demand for office spaces, posing financial challenges for real estate.
  • Future remote work patterns may lead to reduced office needs, altering financial strategies and potentially impacting company cultures and real estate markets.

Originally published in Allwork.space .

Let’s start with a disclaimer: I am not an economist. However, I’ve been involved in the workplace industry for about fifteen years and, like many others, I am left scratching my head when I stop and study the numbers.

The whole workplace industry appears to be like a deer in the headlights — frozen and unsure which way to run. The numbers simply don’t add up, and as the contradictory signals and claims keep being published, the confusion mounts.

Hybrid Eats the World

Wherever we turn, we hear about hybrid this or hybrid that. RTO mandates. The Great Resignation. The Great Mismatch. The fact that 51% percent of employees say they would quit their jobs if their current “hybrid” work arrangement was taken away. Managers threaten to withhold promotions and raises for employees who work remotely (too often).

And then there is the whole self-help consulting industry surrounding hybrid — five ways to be a better hybrid manager or leader, how to build a hybrid culture, how to maximize the effectiveness of hybrid teams, etc.

To be sure, all these bits of advice are helpful, even necessary, but they seem to be an attempt to manage through the confusion and uncertainty, with little sense of permanence or surety.

A strong subtext underneath the whole post-pandemic workplace discussion is the idea that if companies can just weather the storm, things will kind of return to a “new office normal.” That new normal being 2-3 days a week at the office, which would suggest that, more or less, the scope and scale of offices out there will shrink some, but not dramatically.

Some Numbers

According to Stanford economist Nick Bloom, the rates of remote and hybrid work have stabilized a bit. Pre-pandemic, around 5% of workers worked primarily from home, while now it sits around 25%. Also, a pattern of around 2.5-3 days per week of working at the office is becoming a new norm in terms of hybrid schedules.

However, Bloom and his team suggest that, given the patterns in the data (their research on remote work goes back to 2012), the current hybrid patterns will remain stable until 2026, at which time the percentage of those working fully (or mostly) remotely, will start to tick back up.

Not just that, but he anticipates that the rate of growth (of remote work) will be like the Nike swoosh — that is up and up!

While on the one hand we see many CEOs demanding a return to office, on the other hand there seems to be a recognition (at least implicit), that in-office working might not always be the main game in town. The economics behind the office’s precarious position help us understand why.

A Wobbly Picture

A broad overview of the economics of the office paints a grim picture. Interest rates on commercial loans have grown from 3.5% to over 7% more in the last few years, doubling the cost of capital.

This makes the prospect of undertaking new projects super expensive, though some are forging ahead nonetheless. That only feeds the confusion.

Some of the numbers, considered together, don’t add up.

On the supply side:

  • $924B (of the total $4.7T) in commercial real estate debt will need to be paid off via sale, refinancing (at much higher rates that at origination), or extended in 2024 alone
  • Roughly 25% of that total is backed by office loans: $238B
  • In New York City alone, there are 95 million square feet of unoccupied office space
  • Still, nationally around 96.9 million square feet of office space is under construction
  • For New York Community Bancorp, Inc., 57% of outstanding debt (or $111.2B) is in office space. In Q4 2023 alone the bank lost $2.7B

On the demand side:

  • Nationally, office occupancy rates are around 19.5%, with some cities having much higher rates: San Francisco at 27%, and Austin at 24%)
  • Global office utilization rates in Q4 2023 were around 26%
  • Office utilization rates in the U.S. are around 19% (Less than half of pre-pandemic rates)
  • Further:
      • 28% of desks are never used
      • 51% of desks are occupied for less than one hour per day
      • Just 12% of desks are used for more than 5 hours per day

That many employees would rather work from home much of the time is born out by the data. The fistycuffs with management notwithstanding, employees speak with their actions, and those actions suggest that, into the future, the world will need less — not more — office space.

Take One for the Team

In a recent episode of 60 Minutes, one real estate developer, worrying about the fate of central business districts (CBDs) and his own real estate investments (of course), seemed to suggest that workers need to “get over” their post-pandemic independence and re-embrace offices as a kind of sacrifice: to save the economy.

That perspective was scoffed at by Linkedin influencers for weeks, but Linkedin chatter is cheap, and real estate developers wield a bigger stick.

Thus the stalemate. Large-scale projects are largely on hold. Lots of small tweaking-projects, often furniture-based changes, are underway, but with relatively little (historically speaking) capital outlay. The industry is the proverbial deer-in-the-headlights era. Where to go from here?

The Research

If Nick Bloom and his team are correct in their predictions, full-on remote working as a mainstream solution is just getting started. Those who currently work in this way already know that it works.

For those who are convinced of the need for offices-as-usual, two reasons are often cited: culture, and employee productivity.

On the surface, these are legitimate concerns. However, research suggests that employees prefer their independence over their manager’s new-found desire for culture. And in terms of productivity, Bloom’s team has interesting research on this.

Their research suggests that on balance the productivity difference between in-office and at-home working is negligible. They cite some research which suggests a slight decrease in employee productivity for fully remote workers, while their own research suggests that it is a wash.

Further, they raise a question about the differences between “productivity” and “profitability.” By including all the various costs/gains of remote and at-office, the picture is clearer:

  • Lost productivity because of commute times
  • Remote workers work more hours per day than at-office workers (nullifying the narrower productivity per 8 hour day metric)
  • Potential decrease in costs of real estate over the long term
  • Significant decrease in employee attrition and replacement costs (up to 50% of an employee’s salary)
  • Potential of recruiting globally, reducing salary levels considerably

Taken altogether, from a pure financial perspective, remote working, it would seem, can strengthen a company’s balance sheet. It should be noted that company culture does matter, and that co-presence is important.

However, if one is speaking purely in financial terms — the language of most managers — their own logic can easily undermine itself.

Where to Next?

It is still unclear if upcoming loan maturities coupled with debt defaults will trigger another real-estate driven recession. If so, then we might be entering a new crisis era.

If that is the case, then managers might finally regain the upper hand in a context of a tightening job market and diminishing employee voice and options. At such a point, employees might be compelled to sacrifice their current post-pandemic freedom so that companies can amortize (in employee blood, sweat, and tears) all of that unused and increasingly unnecessary office space.

If inflation does finally flatten out and regional banks that hold office loans are able to refinance and/or extend their loans, avoiding another recession, then the take off of Bloom’s Nike swoosh might be on us sooner than later.

If that is the case, then remote working will truly become a new norm, in which case we will be looking at a generation of office-to-residential conversions on an unimaginable scale.



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