Apr 24, 2023 | ALI CLE, The Practical Real Estate Lawyer

Hybrid Work Spawns “Great Decentralization”: A Correction Towards Resiliency? - by Cassandra J. Francis, CRE - Presented by ALI CLE

In the aftermath of the pandemic, one thing everyone can agree on is that remote work is here to stay, sending a clear message to employers as they struggle to retain workers and rethink their business models. Most also agree that Covid accelerated trends that were already emerging, including remote work, online retail, and migration to warmer climates and tertiary urban markets. However, an unexpected shift, the “Great Decentralization,”1 took many by surprise in the wake of this latest global disruption. Reversing a decades-long flow of people and resources to large dense urban areas, this new trend towards geographic and organizational decentralization has changed most regions, with a bracing effect on specific real estate markets and sectors. Government, businesses, and individuals now find they must adapt and evolve in light of this de-concentration, while addressing the increasingly underutilized built environment concentrated in urban areas. This will be particularly challenging given the array of concurrent social, economic, and existential shifts that include inflation, rising interest rates, wage growth, climate change, crime, geopolitical crisis, and wealth divergence. But will these new decentralized development patterns and socioeconomic structures provide the legacy of resiliency that better weather future disruptions and the next pandemic?

Despite pleas from politicians and employers that employees return to the “workplace” to restore normal operations and reinvigorate downtowns, only 40 percent of workers in larger American metropolitan areas have returned to the office.2 Remote and hybrid work is favored by almost 80 percent of US employees who want to work from home at least one day per week3. The closure of offices and the quick adoption of digital mechanisms to support work-from-home modality at the onset of the pandemic provided employees with new freedom to work away from large urban employment centers, allowing them to move to suburbs, exurbs, second homes, and destination locations. Workers sought more living space at lower housing costs, moved closer to family or to more natural and socially distanced environments, all of which contributed to an increase in quality of life and work/life balance. This movement of people and resources has caused many of these further-flung areas to flourish, drawing energy and economic activity from downtowns.

Workers are now accustomed to these benefits and a return to the office would mean potentially much longer or impossible commutes, less time with family, less flexibility and privacy, and increased complexity and costs, particularly with inflation and rising gas prices. Despite reports of isolation, loneliness, blurred boundaries between work and private life, and burnout associated with remote work, workers appreciate the autonomy remote work provides. Now as workers confront the resurgence of Covid,4 they appear to be even more reticent to return to work given viable remote work alternatives.

In today’s competitive labor market, companies must retain existing, or attract new, employees by accommodating remote and hybrid work, at least in the near term. The Great Resignation hit hard, and worker mobility is on the rise. Apple employees and Google Map subcontractors sent a petition to their company’s leadership to urge a continuation of their ability to work remotely after being ordered into the office. Most surveys indicate that the majority of workers favor approximately 2.5 days per week in the office, with a strong preference for Mondays and Fridays at home. Employers are eager to have a return to the office to get the most out of their employees and to cost-effectively utilize their office footprints. Many offices have been reduced in size, mothballed, or are in some state of transition, having expanded technology, improved ventilation, implemented more stringent cleaning protocols, and added attractive new amenities, all which have likely increased capital expenditures. As long as workers have leverage in this tight labor market, companies with an “office-first” mentality, requiring a majority or full return to the office, may need to lighten up, pay more, or suffer the consequences of employee departures.

As a movement to suburbs, exurbs, smaller municipalities, and destination locations continues, other externalities have compounded workers’ desires to work on a hybrid basis. Current inflation, rising interest rates, rapidly increasing housing prices and rents, and uncertainties around schooling and childcare reinforce demand for hybrid working scenarios. Further, the decimation of employment center restaurants and retail, increased crime, increasing taxes, and visible homelessness in once bustling downtowns heighten concerns about working and living in urban centers when less dense, more livable options exist.

As companies consider a reduction in their footprints in response to emboldened employee desires, the key will be to adapt offices for mid-week peak occupancy rates while trying to incentivize employees to spread the peak so reduced space can be better utilized. Employers will need to triage different work functions to specific locations, scheduling office meetings during the middle of the week while pushing phone and computer-based activities towards the shoulders of the week when workers prefer to stay home. Companies may look to invest in less expensive satellite units or shared and co-working spaces as they try to predict their future office needs once work lifestyles normalize and their leverage increases as the labor market stabilizes.

Some employers have found they can add amenities while reducing overall space and travel costs, resulting in overall savings. Curating an appealing, experiential office culture with a focus on interpersonal socializing will become even more important to draw workers to the office, as will prime office locations. Balanced collaboration among asset owners and managers and employers with a focus on the long term will be crucial to provide flexibility in the game of musical chairs that is underway across real estate sectors. A company’s ability to expand, contract, sublet, and terminate early, while rapidly providing more attractive flexible/shared workspaces, may ultimately correlate with its ability to survive, especially as energy, fuel, tax, and labor costs rise.

Proptech and smart building companies can expand their data-collection focus supporting optimal conditioning, cleaning, and maintenance operations to include more precise occupancy, space type utilization, and movements of users’ data through the use of sensors to help companies reevaluate their changing real estate needs. Architects and designers will also be center stage in physically and culturally adapting spaces in unexpected ways.

CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.