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HomeReal Estate NewsCommercialHybrid work model bigger threat to CRE than recession or inflation

Hybrid work model bigger threat to CRE than recession or inflation

Inflation and a potential economic recession may be causing concerns within the commercial real estate industry, but there’s another factor having an even bigger impact: the hybrid work environment, Marcus and Millichap CEO Hessam Nadji told Yahoo Finance.

CRE transactions decreased 22 percent during in the second quarter compared to a year ago, according to data from MSCI. Nadji noted on Yahoo Finance Live that inflation and a recession are on investors’ minds and “creating some hesitation,” but it’s “not really a long-term concern.”

“The bigger concern is this hybrid work environment,” he said. “We’re seeing a lot of focus on amenities like fitness, childcare, and even entertainment to motivate workers to want to come back in at least three days a week, four days a week, whatever it is depending on the company. There’s a lot of focus on how to create a reason for people to want to congregate and come back into the office space.”

Most companies moved to remote work environments during the COVID-19 pandemic. As cases decreased and vaccines became available, a lot of businesses shifted to the hybrid model. It offered a best-of-both-worlds approach — less capital is required for companies because employees are only in the office a few days and using fewer resources, but everyone still gets some in-person face time.

Today more Americans are being offered the hybrid work model, according to a McKinsey survey of more than 25,000 respondents. The survey revealed that 58 percent of respondents have the chance to work from home at least once a week. Meanwhile, 35 percent have the option to work remotely five days a week. Either way, hybrid remains the work mode of choice — 87 percent of respondents said they’d opt to work flexibly if given the chance.

“Certainly, in the office space consumption and new leases that are being signed, we see the hybrid workplace play a big factor in the reduction of footprint and the space needs (new) expectations going forward,” Nadji told Yahoo Finance.

Companies are leasing less office space

A number of high-profile companies such as PayPal, Airbnb and Lyft have decreased their physical CRE footprints in major cities, Yahoo Finance reports. Some have decided to move to permanent remote work set-ups.

A 2021 Accenture study showed that 63 percent of high-growth companies adopted a “productivity anywhere” work model, giving employees the option to work in-person, 100 percent remote or a combination of the two. Businesses have stuck with remote and hybrid models because productivity hasn’t been impacted.

“The overall footprint currently looks to be shrinking,” Nadji said. “I think if you look two to four years out, when we have the next economic cycle, with job growth coming and a lack of overbuilding — there’s very little overbuilding going on in commercial real estate — I think they’re going to offset each other as two factors: one being the reduction of footprint because of hybrid workspace, and then the other being new demand coming into the market.”

However, Nadji also pointed out that some of the fastest-growing companies in the U.S. are acquiring property or land to build new offices, especially in the tech sector. He believes this shift is about being accommodating for more team collaboration and “less about the individual employee space.”

More clients within the CRE industry have also expressed interest in development, according to Nadji. They’re looking to acquire older office buildings that they can upgrade to, “the current kind of a configuration that the market seems to need as a really good investment instead of building brand-new projects.”

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