By Michael G. McGuinness
Effective 6 AM on June 4, 2021, employers had the green light to require their employees to return to the office. Gov. Phil Murphy’s Executive Order No. 243 rescinds the requirement that businesses and nonprofits must accommodate telework arrangements to the maximum extent practicable, and reduce on-site staff to the minimum needed for operations. The order also states that employers no longer need to require masks and social distancing in the workplace for those fully vaccinated.
The speed of the economic recovery has been stunning, as vaccinations and stimulus funds are driving consumer spending. The U.S. economy is expected to recover to pre-pandemic levels later this month. “Key sections of our region’s economy, however, are still reliant on the tourism and travel industries that may continue to be hobbled by slower vaccinations and travel restrictions abroad,” according to Duncan Kisia, a leading economist with Port Authority of New York & New Jersey, who spoke at a recent NAIOP New Jersey forum.
This economic rebound is fueling job growth in office-using sectors, although tenant safety concerns remain a drag on office leasing. According to NAIOP’s Q2 2021 Office Space Demand Forecast, negative net absorption will moderate over the next two quarters, with a return to positive absorption in the fourth quarter of 2021. National office space absorption is expected to stabilize by mid-2022, with quarterly figures expected to average 11.7 million square feet, in line with the 2015 to 2019 quarterly average of 11.6 million square feet. Most K-12 schools plan to resume full in-person instruction in the fall, and that should contribute to a more widespread return to the office. This trend will only strengthen if Congress passes a significant infrastructure package, which is likely.
Although tenants have begun to return to offices, it remains to be seen how widely employers will adopt long-term remote work policies. Surveys showed remote work was successful for many firms, and it is clear that many will partially incorporate this model into future plans. Remote work will likely limit net absorption for the next several quarters. Due to population and pricing shifts, experts expect suburban office space to be in relatively greater demand than central business district space in the near term. Tenant comfort may lead to less dense office layouts than before the pandemic, partially offsetting declines in demand due to remote work.
The NAIOP Forecast assumes a continued rebound in real GDP for the remainder of 2021, 2022 and 2023. Real GDP is expected to expand by 7.7 percent in the next two years, with average unemployment of approximately 4.5 percent. The forecast also assumes that Personal Consumption Expenditure (PCE) inflation will average 2 percent in the next two years. It generally takes several quarters for office net absorption rates to recover from the effects of an economic recession. Under three different scenarios, the office market would return to normal net absorption by the second half of 2022. The baseline forecast assumes that the recent recession will lead to a 15 percent reduction in net absorption (factoring in remote work arrangements), which is in line with what I am hearing.
“Employers planning for a transition to a post-pandemic workplace are faced with a host of novel issues — and addressing a disconnect with employees about what the future of work and the return to physical workspaces looks like it is at the top of the list,” according to The Littler Annual Employer Survey Report released last month. While 71 percent of employers surveyed believe that most of their employees who can work remotely prefer a hybrid model and only 4 percent prefer full-time in-person work, 28 percent of those employers plan to have most employees return full time and in person, and 55 percent will offer a hybrid model.
Questions about returning to the physical workplace and vaccinations are only part of the conundrum facing employers. COVID-19 accelerated the trend of technology displacing employees, and more workers than ever are suffering from “crisis fatigue” and burnout. Couple these ongoing pandemic-related workforce management issues with anticipated federal regulatory changes, and the challenges ahead are daunting. On the regulatory front, most employers (81 percent) are concerned about how changes to paid sick and family leave requirements — a promised Biden administration initiative — will impact business in the next year. Other top concerns: income equality measures (64 percent); inclusion, equity and diversity considerations (55 percent); and health care (51 percent). With more Washington gridlock expected, state and local regulations are high on executives’ radar, with 83 percent expressing moderate or significant concern over associated enforcement and compliance expectations.
More than half of respondents are either moderately or extremely concerned about maintaining company culture, collaboration and employee loyalty in a remote work environment (57 percent) and the impact of the pandemic on employee mental health and well-being (52 percent). Employers are making strides to address these issues (e.g., 84 percent are offering mental health services and/or Employee Assistance Programs) but some may have room for improvement in areas such as implementing new ways to reward employees for their hard work, and training managers to help respond to employees in need.
Now that the future has arrived, I am sure that all employers would agree that employees are the most critical resource for success. Striking the right balance for the new workplace will likely be case-sensitive, and will no doubt take some time and a great deal of patience.
Michael McGuinness is CEO of NAIOP New Jersey and has led the commercial real estate development association since 1997. NAIOP represents developers, owners, asset managers and investors of commercial, industrial and mixed-use properties, with 830 members in New Jersey and over 19,000 members throughout North America.
