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Hybrid Is Here To Stay Even If There's A Recession, CRE Leaders Say

A recession could send employees back into the waiting arms of the office sector, yet any reunion will likely be short-lived, commercial real estate executives said at an industry panel in Atlanta this week.

Greenwood Commercial Real Estate Group principal James Pitts and RCLCO Managing Director Eric Willett

Many economists and financial titans expect a recession to hit the U.S. economy over the next few months, and that could compel employees to report back more often for fear of losing their jobs.

But it is workers who will have the upper hand in the long run when it comes to determining when to come into the office, CRE execs said.

“The balance of power has shifted to the employee over the last 10 years,” said Eric Willett, managing director of the real estate consulting firm RCLCO  during a panel discussion at the National Association of Real Estate Editors annual conference in Atlanta Tuesday.

“The power of the worker is here to stay, barring adverse market cycles. This social contract has been renegotiated.”

Tenants are spooked by gathering clouds that suggest a global recession is imminent. Already, a number of major U.S. corporations have begun layoffs or hiring freezes, including Meta, Microsoft, Amazon, Ford and AT&T.

Meanwhile, employers now view their relationships with employees as a “partnership," according to Mark Toro, an Atlanta-based developer known for numerous mixed-use projects in the Southeast.

Toro said the pre-pandemic formula of expecting employees to come into the office for 40 hours, five days a week no longer fits an environment in which companies are having to do much more than recruit and retain talent.

It has become a matter of getting them into the office at all.

Toro Development Co. founder Mark Toro

“That sort of command and control leadership style is no longer effective,” said Toro, who left NAP last year to form his own firm, Toro Development Co.

Nearly 60% of remote-capable jobs — estimated at 60 million in the U.S. — will have a hybrid schedule moving forward, with 32% fully remote and only 9% in the office full-time, according to a March Gallup report

More than 70% of companies plan to go forward with hybrid work strategies, per a CBRE occupier sentiment survey from this spring.

That will have many companies reducing their overall office footprints.

Corporate contraction is already showing itself in office markets like Metro Atlanta, which is seeing a deluge in shadow office space. According to CBRE, more than 5M SF there is being marketed by companies for sublease.

Just this week, The Home Depot sent shockwaves through the real estate community when it announced that it was subleasing some 600K SF of suburban office in the Cumberland/Galleria submarket as the home improvement retailer’s support center workers shifted to a hybrid model.

Nationally, the tenant office contraction has only just begun, Willett said, with fewer than 50% of outstanding leases having expired since the pandemic.

Looming renegotiations are likely to see vacancy rates rise among commodity office buildings. 

“We’re going to see the burnoff of this Covid reaction over the next five years,” Willett said. “There is a real concern on the stability of demand for those B and C properties. Those are the buildings that are facing a demand challenge moving forward.”