The pandemic is over. One of their enduring legacies is that working from home has gone from being the exception to a normal part of many professions.
As a result, companies need less office space. According to an Ifo study, the proportion of unused workplaces in offices has tripled. In some sectors the trend is even stronger.
Companies are now starting to reduce their office space, in some cases significantly. This is increasingly affecting the office real estate market.
Working from home is here to stay. The longer the lockdowns of the corona pandemic were in the past, the clearer it is that mobile work is here to stay. More and more companies are adapting to this: on the one hand, they try to get employees back to the office more often with incentives or fixed rules. On the other hand, they are planning with less office space: companies are renting out space, merging locations or abandoning projects for new office space or entire buildings. The trend is increasing – and is breaking through on the real estate market.
Anecdotes of empty offices, underutilized canteens, and vacant parking lots in office areas on Mondays and Fridays are a popular party topic of conversation among office workers. Since a systematic Study by the Munich Ifo Institute the trend is also documented with numbers. Even weeks after the official end of the corona pandemic and more than a year after the last lockdowns, working from home has gone from being a trend to becoming a fixture of the working world. “Around a quarter of employees regularly work from home,” says Ifo expert Simon Krause.
The result: The proportion of workplaces that are not used in companies on an average weekday is around three times as high today as it was before Corona. “Currently, 12.3 percent of all workplaces on site are underutilized on an average day because of home office. Before Corona in 2019 it was only 4.6 percent,” says Krause.
There are big differences. In the service sector, the share rose from 6.2 to 16.8 percent. A particularly large number of jobs are physically vacant in IT professions, in advertising and market research, management consulting and in the pharmaceutical industry. The share in manufacturing, trade and construction has also increased slightly, but is significantly lower.
Companies are increasingly preparing for this to remain the case. “Some are converting empty offices into co-working spaces for more personal exchange on the presence days,” says Krause. “Other companies are reducing their space requirements in order to save costs for the unused offices”.
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One example is Deutsche Bank. Germany’s largest financial institution wants to reduce its office space in Frankfurt and Eschborn by 40 percent by the end of next year, the FAZ reported. Several buildings are to be handed over completely, entire locations are to be abandoned.
Krause: “This can have consequences for the real estate market have, because of increased interest rates and construction costs are under pressure anyway. In addition, the decline in office use is hitting inner cities particularly hard. There are more than average offices there and shops there are also suffering from lower retail sales due to working from home”.
Dark clouds over the office real estate market
A storm is brewing in the office real estate market. Market observers describe the combination of lower space requirements due to more home offices, the weak economy up to an incipient recession in Germany, and increased interest rates and construction costs as a real danger for the market.
The real estate group Aroundtown, whose shares are listed in the M-Dax of medium-sized German stocks, even had to report a loss of 21.6 million euros for the first quarter of 2023. The reason was lower valuations of his real estate. In the first quarter of 2022, Aroundtown had made a profit of 124.5 million euros. The operating result also fell by 3.8 percent. Aroundtown does most of its business in commercial real estate. The company remains optimistic for the year as a whole.
This also fits the mood of most market observers. There will probably be a correction. It becomes more difficult, above all, when renting office properties in unfavorable locations or with a high need for modernization.
In the US, nervousness is somewhat greater following the collapse of several regional or specialist banks as a result of interest rate hikes. There has also been no significant correction in the commercial real estate market since the 1990s. The correction could be particularly painful in the extremely expensive metropolises of San Francisco and New York City, Anne Walsh of Guggenheim Partners told the Financial Time. “We’re probably going into a real estate recession, but not for the overall market.”
Charlie Munger, vice chairman of legendary Warren Buffet’s Berkshire Hathaway, nonetheless warned that something was brewing in the US. Some banks have a lot of bad loans. “A lot of real estate isn’t looking as good anymore,” Munger said. “Many office properties, many shopping centers and many other properties are in trouble.”
One of the most famous office buildings in the world, the triangular “Flatiron” building, after which an entire New York City district is named, has just experienced a spectacular drop in price. Due to a dispute between the owners, the office building, built in 1902, had to be sold by court order. At a first auction, a bidder was awarded 190 million US dollars. However, because he failed to pay the first installment, his purchase right expired. When it was repeated, the famous office building in Manhattan came under the hammer for $161 million.