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Remote work is transforming what types of real estate are in demand and where that space is located. As the work-from-home rate continues to plateau well above pre-pandemic levels, the need for office space has fundamentally changed, creating new challenges for office-centric districts and new market opportunities for one-time bedroom communities.
According to monthly survey data from WFH Research,[1] the percentage of paid full days worked from home stands at about 28.7% as of March 2023, down by about half from a peak of 61.5% at the onset of the pandemic in May 2020.
The working-from-home rate fell substantially through 2020 and early 2021 and then began to level off, continuing to tick down just slightly. The share of workdays worked from home first fell below 30% back in April 2022, meaning in the course of an entire year, the rate has fallen by barely one percentage point.
At the current rate, the average worker is working remotely for about 1.5 workdays per week or about six workdays per month. That’s compared to about once a month in 2019 when just 4.7% of all workdays were worked from home. About 6 in 10 workers are fully on site, 3 in 10 are hybrid, and 1 in 10 work from home exclusively.
Does that mean that everyone who can work from home takes advantage of the opportunity? An estimated 63% of full-time workers have the option to work remotely at least part of the time and do so an average of 2.2 days per week. Of those that have this option, 19.6% work fully from home, 45.7% are hybrid, and 34.8% forgo that opportunity and choose to work onsite.
Remote Work: Office Space Demands Dwindle
Despite some headlines to the contrary, it does not appear that the working-from-home rate is going to be changing dramatically any time soon. The rate may tick down a few more percentage points, but we seem to be reaching a point of equilibrium, and this is having a big impact on the demand for and availability of office space in many communities.
To illustrate the reduction in the demand for office space that is underway, consider an office with 100 workers. Prior to the pandemic, a typical ratio of office space per worker was in the range of 150 to 200 square feet. If we call it 175, that’s 17,500 total square feet of office space to accommodate these 100 employees. Post-pandemic, several different types of scenarios are playing out in offices across the country:
- Scenario A: At one extreme, the office remains 100% in-person, and overall space needs remain at 175 square feet per worker. The company continues to occupy its 17,500-square-foot (SF) space.
- Scenario B: Employees are permitted to work remotely up to 50% of the time in a hybrid model. However, most workers want to work in the office Tuesday, Wednesday, and Thursday and work from home Monday and Friday. The company is able to reduce its office footprint by 20% by implementing a desk “hoteling” policy, which allows staff to reserve on-site workstations or meeting spaces in advance. On Mondays and Fridays, there are a lot of empty workspaces. Space needs fall to 14,000 SF or 140 SF per worker.
- Scenario C: Intent on maximizing efficiency in space utilization, the employer splits the company into two teams. Each team comes into the office two days per week. Team A comes in Monday and Wednesday and Team B comes in Tuesday and Thursday, with the teams taking turns using the same workspaces. In this scenario, 40% of hours are worked in the office, still above the current economy-wide average of 28.7%. Office space need is cut by 50% to 8,750 SF or 87.5 SF per worker.
- Scenario D: At the other extreme, the office goes 100% remote, and the company chooses not to renew its lease. Office space usage falls to 0.
What plays out on a macro scale will be dictated by individual decisions at the company and worker levels. If we use the share of paid full days working in the office as a proxy for space utilization, we can estimate what future office demand might be. In 2019, 95.3% of days were worked in the office compared to 71.3% as of March 2023. This represents a 25% drop in office days worked.
At a maximum, we might estimate that 25% less space is needed compared to pre-pandemic times. However, as illustrated in the scenarios above, it would be logistically challenging for a company with a hybrid work arrangement to ensure that workspaces are being used 100% of the time. At the same time, the pandemic has caused us to give more consideration to limiting the density of workers in enclosed spaces. So perhaps in reality, the overall reduction in office space needs ultimately settles in the 5-15% range (all else being equal).
But with 42% of full-time employees across the economy currently working either hybrid or fully remote, it is all but a certainty that aggregate office space demand will continue to fall by a meaningful amount as office leases end and employers settle on a policy that works for their company.
This is not playing out the same way across geographic locations. The share of days worked from home in the top 10 largest metropolitan areas (or more precisely, combined statistical areas as defined by the US Census) is 33.4%, compared to 28.4% in the next largest group of metro areas (top 11-50), and 24.7% in smaller metro areas (population of less than 1.17 million people).
Accordingly, employment centers in larger cities are seeing lower office space utilization and downward pressure on the demand for space. This applies not only to office space, which is being consolidated and downsized but, in some cases, to residential and retail space as well.
With remote work granting the ability to commute less often or not at all, there is less of a need or desire to live near employment centers and workers who would prefer to live in less-dense environments can do so with fewer tradeoffs. Of course, some workers prefer to live in urban environments regardless of where their jobs might be, but on the whole, demand is less. Similarly, demand for retail space catering to urban office workers and/or residents is also therefore constrained since its customer base has been reduced.
The ‘Bedroom Community’ Awakens from Its Slumber
This means that people are spending more of their working hours and overall time in suburban and residential areas. Suburbs or exurbs that have traditionally been “bedroom communities” have untapped potential to capitalize on the spending power of residents who are now spending more time close to home. The monthly gym membership, lunchtime meal, mid-day haircut, after-work grocery run, or happy-hour drink that was purchased near work is now happening in residential areas, provided there are establishments offering these services nearby. This relocation of spending potential means more buying power for suburban businesses to leverage. It also suggests higher demand for suburban housing and even for suburban flexible office space such as coworking space.
In 2019, the average one-way travel time to work was 27.6 minutes. For a worker commuting five days a week, that was 276 minutes (4.6 hours) per week spent commuting. Someone traveling to an office twice a week could more than double their one-way commute time and still spend less time getting to and from work. This significantly expands the geographic area where that worker might consider living, bringing new communities into that central city’s potential laborshed and thereby expanding the residential market area from which those communities might draw new residents. By the same token, it also means closer-in suburbs have new competition in attracting residents.
The presence of remote-worker-oriented amenities in suburban or exurban communities gives communities a competitive edge in attracting new residents. These might include:
- Flexible office or coworking space
- Business services such as printing, copying, and shipping
- Formal meeting spaces such as executive suites rentable by the hour
- Informal meeting and working spaces, such as coffee shops
These services, especially when in proximity to other dining, shopping, recreation, and entertainment amenities, further add to the draw. It’s even better when all these uses are clustered together in walkable, mixed-use districts with housing as part of the mix.
And when the possibility of remote work and occasional commuting meets the increasingly unaffordable housing prices in closer-in suburbs, you really begin to see the economic calculus needle shift towards remote or hybrid workers moving to communities located even further away. These “exurb” communities stand to gain if they recognize this opportunity and ensure they have the right mix of infrastructure, housing, and amenities in place to welcome remote workers.
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[1] Barrero, Jose Maria, Nicholas Bloom, and Steven J. Davis, 2021. “Why working from home will stick,” National Bureau of Economic Research Working Paper 28731. www.wfhresearch.com
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