Hybrid work ‘bigger concern’ than inflation or recession for commercial real estate: expert

Commercial real estate is down and hybrid work is a big reason why, according to one real estate executive.

According to data from MSCI, commercial real estate transactions fell 22% in the second quarter from a year ago. And while inflation and an economic recession are both weighing heavily on the minds of real estate investors and “creating some hesitation,” Marcus and Millichap CEO Hessam Nadji said that it’s “not really a long-term concern.”

“The bigger concern is this hybrid work environment,” he said on Yahoo Finance Live (video above). “We’re seeing a lot of focus on amenities like fitness, child care, 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.”

Amid the pandemic, many companies were forced to shift their workplace settings away from strictly in office to remote working environments. As cases began coming down and vaccines became readily available, many companies opted for hybrid work — meaning a mix of both in-person and remote work — for their employees.

Hybrid work ‘bigger concern’ than inflation or recession for commercial real estate: expert

Alex Swaton from United States works remotely from Las Palmas De Gran Canaria, amid the coronavirus outbreak, in Gran Canaria, Spain July 23, 2021. REUTERS/Borja Suarez

Hybrid work environments require less capital from companies as workers going into the office just a few days per week require less physical space at work for individual tasks, working with fellow employees, communicating with clients, etc.

A McKinsey survey of more than 25,000 respondents found that 58% of Americans have the opportunity to work remotely at least once a week, while 35% report having the option five days a week. And when given the chance to work flexibly, 87% take the opportunity.

“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 said.

‘The overall footprint looks to be shrinking’

Companies like Yelp (YELP), PayPal (PYPL), Airbnb (ABNB), and Lyft (LYFT) have dramatically reduced their physical footprints in major cities or even shifted to permanent work-from-home setups.

An Accenture study from 2021 found that 63% of high-growth companies adopted a “productivity anywhere” workforce model, meaning that hybrid, in-person, or entirely remote work policies are all on the table. And several studies have found that the remote or hybrid work model has not had a negative effect on productivity.

“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.”

A man looks at an empty commercial real estate retail space in Santa Monica, California, U.S., June 16, 2022. REUTERS/Lucy Nicholson

A man looks at an empty commercial real estate retail space in Santa Monica, California, U.S., June 16, 2022. REUTERS/Lucy Nicholson

At the same time, though, Nadji highlighted how some of the fastest-growing companies in the U.S. are either acquiring buildings or the land to build future buildings. Tech companies, in particular, are looking for additional space due to the growing popularity of large data centers.

“The composition of space utilization is changing for sure to accommodate for more team and collaboration and less about the individual employee space,” Nadji said.

Additionally, he said, within the commercial real estate industry, clients interested in development have stepped up, “looking for opportunities to take … older office buildings and actually older properties in every segment, and improve them, upgrade them, bring them up to the current kind of a configuration that the market seems to need as a really good investment instead of building brand-new projects.”

Ethan is a writer for Yahoo Finance.

Click here for the latest economic news and economic indicators to help you in your investing decisions

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube