Return-to-office mandates are becoming increasingly popular among employers. A recent study from Unispace found that 72% of employers worldwide have return-to-office mandates in place, despite strong direct correlations to employee attrition. Some argue this departure from remote work — and a forcing of back-to-office policies — is due to a suffering commercial real estate industry.
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Let’s look at the facts:
- In the last two years, per Unispace, 75% of companies increased their commercial real estate (CRE) footprint.
- Banks have reported weaker demand for CRE loans and there’s been a widespread decline in prices, according to the Federal Reserve.
- Interest rates have increased and banks have tightened their standards on CRE loans.
During the COVID-19 pandemic, office buildings across the U.S. sat vacant while many people worked from the comfort of home. This development decreased the demand for retail and office spaces. Companies continued to begrudgingly pay for unoccupied offices. At each quarterly and annual budget review, the glaring cost of unused offices was likely a fiscal elephant in the room.
As the economy entered an inflationary period, interest rates climbed and banks tightened their lending standards for CRE loans. This put many businesses in a hard spot. Some companies saw the writing on the wall and transitioned their teams to a hybrid or fully remote work schedule while quietly offloading their commercial real estate holdings. Others did not.
Why Losses on CRE Loans Matter
Financial losses on heavy-hitters like commercial real estate loans (a $20 trillion industry) could raise the potential for more bank failures. According to the 2023 Financial Stability Report from the Federal Reserve, financial institutions hold 60% of all commercial real estate loans, so sustained losses could shake the financial stability of major banks in an already volatile market.
This sentiment is echoed by data from the “Survey of Salient Risks to Financial Stability” subsection of the Fed report, wherein 52% of researchers, academics, and market contacts cited commercial real estate as a significant risk to the country’s financial stability.
The Tables Have Turned
Another finding from the Unispace study indicated that employees aren’t exactly thrilled about returning to the office — with 51% being reluctant to return. The Great Resignation put more leverage (and higher wages) in the hands of employees, but as the job market continues slowing, the tables have turned.
Employers have the advantage again and fed-up employees must make the choice to return to the office or risk re-entering a volatile job market. Companies are answering this desire for remote work with a combination of tactics.
Many organizations offer positive coaxing back to the office via hybrid work schedules and increased office amenities. On the flip side, employees who don’t comply with the return mandates risk being included in the latest string of layoffs and forced resignations.
Bottom Line
Although employees generally find remote work to be the more desirable situation, employers are struggling to squeeze the value out of their expensive commercial real estate holdings. This decline in demand and the ability to pay for commercial real estate could potentially impact the financial stability of banks with large CRE portfolios. For employees who don’t want to re-enter the job market, that means making the best of a return to the office.