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As cities open up, will workers who left during the pandemic come back?

High income household migrations during pandemic and NY-SF sublease trends show potential risks

The steady rollout of vaccines appears to have helped to avert what some feared would be the end of traditional office work life in major metropolitan areas. But how the post-pandemic office market will respond to flexible work trends — particularly in pricey cities like New York and San Francisco — is still taking shape. 

Many workers left the big cities during the pandemic. Will they return, despite some having gone so far as even changing their address? What are they willing to give up in favor of remote or flexible jobs? Owners as well as occupiers of commercial office space face a lot of unknowns. 

An expectation is taking hold that large numbers of employees will be back to working in the office after Labor Day. This view has held steady since the start of 2021, as our own survey of workers conducted in late 2020 showed. 

It tells us that the fourth quarter of this year is likely to kick off a transition period as companies implement and then judge the merits of their office strategies. How and where professionals work is still being defined. Leading tech companies are offering more flexibility to employees to stay remote or be in office only as-needed for team collaboration. At the same time, some of the largest financial institutions are calling some workers back to the office this summer. 

These adaptations will bring new risks and opportunities, and a new landscape for negotiation. Staying close to three indicators — worker migrations, sublet space uptake rates and the options being offered by industry leaders — can help provide owners and occupiers an early view into the degree to which the 2020 shifts are durable, or if the migration trends will reverse once offices fully reopen in major cities like New York.

Worker migrations offer clues on future office demand

In 2020, working age households saw relative growth in less expensive cities as well as in some more remote locations, such as the Rocky Mountains, particularly compared with New York, San Francisco, San Jose and Stamford, according to a household migration analysis by PwC.

A deeper look into trends for household income levels provides additional color into whether those workers might return to the biggest markets, or if their moves are more permanent. How many of them have really moved?

There were shifts in populations that demonstrated the pandemic may have broken the hold for some working age adults preferring the pricier metropolitan areas. Cities like Atlanta, Dallas, Phoenix and Sacramento saw increases in working age households that make more than $100,000 in 2020 versus 2019, while Chicago, Detroit, New York, San Francisco and Washington DC became less attractive, on a relative basis.

Meanwhile, there was growth of new residents making more than $175,000 a year in enclaves such as The Villages in Florida and Prescott Valley in Arizona, and to remote, idyllic places like the beach-and-mountainside Port Angeles in Washington.

Workers making less than $100,000 a year were also less drawn to Los Angeles, San Jose and other relatively expensive cities, while populations of those workers grew more in cities like Cleveland, Detroit, Pittsburgh and Tampa.

Still, it’s hard to know if workers who migrated out of New York City, for instance, perhaps didn’t simply retreat from the metropolitan area for the worst of the pandemic with plans to return as offices reopen. Upstate New York areas such as Binghamton and Olean were relative gainers for workers making under $100,000. Could it be that many young professionals left their small New York City apartments and went back to their hometowns just to ride out the lockdowns of 2020?

One indicator of a potential New York City rebound can be seen in residential sales in Manhattan, which hit 14-year highs in March. One caveat: It’s difficult to precisely attribute those sales to returning workers, or if the uptick was spurred by price discounts or low mortgage rates.

Employer trends in remote work and flexible options

Wall Street has been fairly assertive in resisting the remote work trend. Some companies are taking a hybrid approach in which they’re no longer expecting a full-time, in-office presence even from full-time staff. This can mean identifying certain days as mandatory in-office with others more flexible. 

Big tech brands are offering even greater flexibility, and we’re seeing many firms using location flexibility as a recruiting tool. This suggests a new power of choice for employees and tenants — and new complexities for landlords.

For employees, there’s no clear model. Those who write software or who do financial analysis, for example, may have found themselves much more productive without the distractions of work in the office, whereas many parents of small children found themselves struggling to focus on their work at home. Some who are established in their careers may have the political capital at work to forgo the commute and the cubicle, while other professionals may find they need to be near their networks and clients.

Sublet space suggests an office reset

In both Midtown New York and San Francisco, office vacancy rates are estimated by Cushman & Wakefield at 16.8% and 18.7%, respectively, both higher than vacancy rates during the financial crisis and the dot-com bust. If those numbers are alarming, it’s not quite showing up in deep discounts to rents, or even tenant improvement allowances, but rather in landlord concessions, such as a free year of rent. 

There is, however, another flashing red light to monitor: Sublease space is accumulating. 

In Manhattan, vacant sublet space rose to an historic high of 19.3 million square feet in the fourth quarter, according to Cushman & Wakefield. In San Francisco, it was 8 million square feet of vacant sublet space, representing around half of all vacant space.

This sublease inventory may grow as businesses resume operations with fewer employees, which — unless they decide to rethink their space and spread their teams out — will likely spur moves by these companies to reduce their footprint. New York City and San Francisco office occupancy rates were 17% and 15.6% respectively in mid-May, the lowest among the 10 metro areas that Kastle Systems tracks from keycard, fob and app access data. 

The amount of short-term sublease available on the market versus longer term, typically over three years of term or more remaining, will be important. An abundance of longer terms may imply deeper, structural changes in how tenants with long leases are managing their space. And longer-term available subleases will compete with direct vacancy space on offer as well.

Strategies for office space owners: Reuse, recycle, reduce

Landlords have options, of course. They can offer tenant improvement allowances for companies that need to reconfigure their spaces for a hybrid, and more distanced, workforce. Landlords can offer flexible terms, such as upsizing rights to be attractive to high growth companies. 

Given the amount of sublease space available, owners will likely have to come to grips with more flexibility, including shorter-term leases than the pre-pandemic standard of around five years. For example, tenants may be willing to consider shorter terms and handle some of the space reconfigurations themselves, as they determine what they want to do next with their office footprint. 

Amenities that tenants most desire are in a state of flux. Workplace technologies (including highest-speed broadband access and safety) are emerging categories that concern commercial real estate. The emphasis on safety is driving new approaches, such as touchless surfaces on things like automatic doors, turnstiles and elevators. 

Building owners can take a page from the co-working model and create much more flexibility for companies experimenting with hybrid and remote workforces. There might be some bets to be placed for owners who want to upgrade from one class to another, where there might be attractive economics.

If all else fails, there’s always capacity for adaptive reuse such as self-storage — a cash generator in big cities and a fit for Class C spaces — or last-mile fulfillment space as same-day delivery and click-and-collect shopping becomes more popular. Food and beverage and retail spaces can add more of an amenity-like appeal to office spaces as well.

Strategies for occupiers: Upgrade, expand, improve

Tenants may have more options than ever. This market offers a chance to experiment, and a tenant can sublease or seek to shorten lease terms while offering its workforce alternative locations in a hub-and-spoke model.

This can be the moment for a start-up to capture an upgraded Class A office space that it would not previously have been able to access. Or a company might negotiate for tenant improvement allowances to experiment with new configurations that redefine its use of the space or satisfy new worker expectations.

Clearly, the pandemic brought changes to how corporate work gets done, as well as where the work takes place. For most companies, remote work has been a success. The big cities will adapt and change with the demographics, as they always do. New York and San Francisco, particularly, may see a resultant change in the use of office space, designed for different tenants, perhaps a change in density and perhaps a changing workforce.

Contact us

Byron Carlock, Jr.

Real Estate Leader, PwC US

Ed Faccio

Partner, Real Estate Strategy and Transformation, PwC US

Dr. Deniz Caglar

Principal, Strategy&, PwC US

Erika Ryback

Director, Real Estate Strategy and Transformation, PwC US

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