A White Flag on Returning to Office?

Another domino in the great office-real-estate reshuffling is about to fall—and with it, a possible resolution to return-to-office efforts.

New data shows an increase in loan defaults for commercial office buildings, most notably a recent $750 million default for two Los Angeles buildings. According to the data, an average of between 5 and 10 office buildings are added each month to a watch list of properties at risk of defaulting—a result of leases not being renewed by companies that have shifted to remote and hybrid work. 

Anthony LoPinto, global sector leader of the Real Estate practice at Korn Ferry, says more defaults are on the way. This will set the stage for a massive reordering of the commercial real estate market between now and the end of the decade. “There are significant debt maturities coming up over the next three to five years,” says LoPinto. “This is just the tip of the iceberg.” One commercial real-estate firm is predicting office-vacancies to nearly double, to 1.1 billion square feet, by 2030. 

This blunt assessment suggests that companies are no longer trying to renegotiate or extend leases, and that they have decided, in many cases, not to push for all employees to return the office full-time.

LoPinto says the nonrenewals and potential defaults are especially common among older buildings lacking state-of-the-art features, environmentally conscious design, and other characteristics that might attract big brands as anchor tenants. “Older real estate is going to suffer more from occupancy issues than newer buildings,” he says.

The declining renewals are in stark juxtaposition to leaders’ ever-louder calls for workers to return to the office. Data from office-security firm Kastle Systems shows that office-occupancy rates appear to have topped out at below 50%. Experts cite several factors to explain the stagnating occupancy rates, among them widespread layoffs across sectors, hybrid scheduling, and the inflation of occupancy rates pre-pandemic caused by the coworking phenomenon sparked by WeWork and others. 

Not all leaders are giving up on the return-to-office movement, and those that haven’t continue to cite their reasons. They say that companies are experiencing record attrition in part because of the loss of culture caused by a remote-work environment. They point to an increasing body of evidence showing that onboarding and engagement are both suffering significantly. Tamara Rodman, a senior client partner in the Culture, Change, and Communications practice at Korn Ferry, says wanting people back in the office and decreasing office space are not necessarily in opposition. Rather, she says, leaders need to do a better job of “offering something in the office that you can’t get at home.”

For more information, contact Korn Ferry’s Real Estate practice. 

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