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Analysis: Could a recession save the CRE office sector?

It’s hard to fathom the words “recession” and “good” ever being paired together, but for a desperate commercial real estate office market, it just might be the case, GlobeSt.com reports. A recession just might be the way the office market sees its way out of its current jam.

Nationally, office occupancy rates are down to between 40 and 45 percent, Deloitte Consulting told GlobeSt.com. Before the COVID-19 pandemic, occupancy rates were approximately between 61 and 65 percent. The drop off has building owners and operators concerned about their businesses’ future.

The thinking of how a recession could help the office market is that it would lead to layoffs and reductions, returning leverage to employers over their workers. That leverage could encourage remote workers to return to their office out of fear of losing their jobs.

Massive job losses often go hand-in-hand with recessions, per the Federal Reserve Bank of Cleveland’s research. When a recession occurs, the unemployment rate increases and vice versa. Additionally, the forward-looking net rising index for employment over the next three months was -7, according to a recent National Association of Business Economics member survey. This figure is calculated by the percentage reporting an increase against those reporting a decrease. It’s the first time the outlook was a negative number since 2020, GlobeSt.com reports.

Do employers actually have the upper hand?

Businesses could cut jobs if a recession occurs, but it’s not a given. GlobeSt.com notes that the current unemployment rate, 3.5 percent, is the same as it was in February 2020, but has not been matched since November 1953. Additionally, there are fewer people available than jobs companies need to fill. With that in mind, companies may wonder if they truly have the leverage to make employees return to the office.

Cushman & Wakefield actually posed the question about whether a recession would bring employees back to the office in its “10 Critical Questions for 2023,” GlobeSt.com reports.

“In-person office attendance trended higher throughout 2022 as the pandemic faded,” Cushman & Wakefield wrote. “As recession fears climbed in recent months, the trend has become stronger. The long-term trend in office usage is going to be driven by the ability of building owners and occupiers to create spaces and places where employees want to be, are productive, and have options to connect, innovate and get all types of tasks done efficiently.”

This means, employers will have to find ways to make their workers want to come back to the office rather than simply making them return, despite all of the economic uncertainty that currently exists. For example, employees’ office attendance was approximately three times greater if their building had attractions such as restaurants and retail locations around vs. those in “non-vibrant” neighborhoods, according to Cushman & Wakefield’s cell phone location data analysis.

The office market might not want to root too hard for a recession, however. If businesses are forced to cut costs, they might start with employees and other expenses, but if it’s not enough, they may start to wonder if all the office space they’re leasing is truly necessary, GlobeSt.com reports.

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