Stranded Office Assets: The Need for a Comprehensive Solution
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
In recent times, the face of office work has transformed beyond recognition. With the rise of remote and hybrid working as an accepted norm, corporations are left with the challenge of adapting their spaces and strategies.
Some employers have tried to mandate returns to the office, under the presumption that it would support, if not amplify, the value of their office properties while postponing the need to change business models.
Seeing the Complete Picture of Stranded Office Assets
However, a closer look reveals that, without an overarching understanding of the broader implications of this shift, such “mandates” may just be superficial gestures.
The evidence points toward a growing trend of stranded office assets, calling for an artful and comprehensive workout to address the situation.
Understanding the Superficiality of Return-to-Office Mandates
Even with some talk of a surge in returns to the office, the momentum remains muted. This suggests that, while corporations might be verbally endorsing the value of office spaces, they're not truly backing it with decisive action.
This divergence between word and deed can be attributed to a lack of public alignment with the recently-elevated bargaining power of remote workers. In their quest for flexibility, productivity, and work-life balance, remote workers have effectively redrawn the boundaries of the workplace.
Lip Service About Stranded Office Assets Yields Sub-Optimal Results
When employers mandate returns to the office without a deep understanding of these changing dynamics, which they likely possess, they're essentially going through the motions for public consumption.
By saying the right things without genuinely understanding or respecting the shifting preferences of their remote employees, companies are not merely alienating their remote workforces but also failing to capitalize or cut losses on their office properties that remain on their books.
Lending on Commercial Properties: Slowing Momentum
A key indicator of the diminished allure of office spaces is the slowing down of lending on commercial properties. There has been a sustained slackening since Q2 2022 in commercial real estate lending.
This points, perhaps, to a lack of confidence in the traditional office space model, further affirming the notion of many office assets as 'stranded.' The waning enthusiasm in CRE lending is a significant warning sign for corporations contemplating heavy investments in office properties.
Remote Workers' Bargaining Power Growing
Remote workers' negotiating power has subtly, but decisively, shifted to the hands of employees who have tasted the freedom and efficiency of remote work as Boomers have entered mass retirement.
Unlike commodity resources directed by fiat, but instead key determinants of value in both the office property and corporate strategy equations, remote workers and their implicit bargaining power have become a pivotal force in this transition.
For corporations, understanding and aligning with this changing dynamic could prove pivotal. Any attempt to boost the value of putatively underutilized office properties should come from a place of genuine understanding of this new value trade-off between employers and remote employees.
Stranded Office Assets: Toward a Comprehensive Workout
With this evidence at hand, it's becoming evident that we're staring at a potential glut of particularly sub-class A, suburban office spaces that may not see the kind of demand they once did. Finding new in-demand uses for these properties is a challenge for the modern age.
This predicament calls for a comprehensive workout at a scale we've not seen before, as these stranded office assets could otherwise mire many communities in acute loss scenarios that take years from which to recover.
The immediate gross challenges that arise in need of a comprehensive workout include:
- Valuation of Properties: Determining a fair market price that can yield profits to new owners without ruining sellers.
- New Ownership Structures: Who will end up owning and profiting from these assets? Traditional corporations, co-working spaces, or a new breed of specialized, perhaps modular entrepreneurial ventures? Interchangeable parts were a highlight of the industrial revolution, but have not made inroads into corporate or office structures.
- Reimagining Spaces: How can these spaces be repurposed over time to ensure they remain relevant and utilized? Creativity is called for in the service of sustainability.
- Funding and Direction: Funds will need to be provided at the national level while allowing for local determination of the highest and best uses, subject to certain constraints.
By attending to these in advance, a strategy can be formulated for avoiding, to the extent practicable, the pain of converting derelict office structures to productive forms one at a time for decades.
We Underappreciate the Magnitude of Remote Work's Impact
The winds of change are strong, and they're reshaping the world of office work in profound ways. The need of the hour is not mere mandates that lack depth but a comprehensive workout that addresses the emerging reality of stranded office assets.
As we navigate this transition, the clarity with which we understand and respect remote workers' value proposition and resultant bargaining power will determine the future of office spaces as we know them.
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