Return-To-Office Reluctance vs. Recession: How Opposing Forces Could Impact Office

Office owners and employers nationwide have more months of uncertainty ahead as an expected recession and the well-worn dynamics of a downturn combine with the vagaries and unpredictability of the return-to-office movement.

Recessions usually mean more power for employers as workers worry about their jobs, which could create leverage for getting people back to the office instead of serving as a salary governor as in downturns past. But in a post-Covid world, nothing is that simple.

"The executives that we talk to on a daily basis certainly want their people back," said West, Lane & Schlager principal Richard Lane, a tenant representation specialist in metro Washington, D.C. "Given their druthers, they'd like people to come in three or four days a week, and if the labor market changes, we might see a bit more of that being mandated."

Much could depend on the severity of a future recession. Some past recessions would have probably given employers the upper hand in scheduling work, had that been an issue, Vanderbilt University Professor of Sociology Daniel Cornfield told Bisnow in an email.

These include the recessions of the mid-1970s, when U.S. unemployment peaked at 8.6%, the early '80s, when the rate reached 10.8%, and the 2008 Global Financial Crisis, which saw a 9.9% unemployment peak, Cornfield said, citing National Bureau of Economic Research data.

Another line of thinking is that a recession will be temporary, while the paradigm shift when it comes to office work is permanent enough to weather a downturn. 

Hybrid schedules are now baked into employer-employee expectations, in other words, since the pandemic proved white-collar companies can function and even thrive with a lot of remote workers. 

The question now is the proportion of in-house work versus remote, not the existence of hybrid work, and so far many employers are trying to coax workers back, as opposed to mandating their return.

"Executives aren't as concentrated on when employees will return to the office or on how many days of the week," Savills Managing Director for Occupier Services Amy Fobes said.

Instead, they are focused on how to create spaces that their employees will want to come to, said Fobes, who is based in Denver.

"The change, which I believe is permanent, is a shift away from dated and uninspiring offices where little to no engagement occurs and employees are heads down and working," Fobes said.

"Hybrid schedules are a permanent part of the workforce forecast," said T. Dallas Smith & Co. President Leonte Benton, based in Atlanta. "Workers are requiring flexibility now more than ever, and many employers are meeting that demand in unprecedented ways." 

Studies show that empowering employees to make scheduling decisions is directly tied to productivity, Benton said, and a recession isn't going to change that. 

"So an economic downturn could increase opportunities for employers to offer hybrid options, versus pressuring them to return to traditional schedules," Benton said.

Now offices are increasingly spaces for people to collaborate, rather than stare at screens, Greater Phoenix Economic Council Vice President of Business Development Samantha Pinkal said, so the impact of a recession might be a moot point, as construction has continued on office spaces that offer amenities to draw in potential employees.

"Many businesses have also taken on a fluid hotel model — operating within a shared space, with multiple units under the same roof," Pinkal said. 

Plus, recessions overall are generally bad for office markets. Companies lay off workers and shrink their spaces. So even if employees are motivated to come back to the office, downsized office requirements could negate any gains, keeping net absorption flat.

For now, the question of a recession forcing workers back is theoretical, since while a recession is widely expected and feared, it hasn't yet arrived.

Despite raging inflation this year, the headline U.S. unemployment rate as of July is 3.5% and S&P 500 earnings for all of 2022 are now forecast to grow 8.1% (though that is down from a 9.5% estimate in July), Reuters reports, citing Refinitiv data.

Economists think there will be a recession, as an almost inevitable side effect of the U.S. Federal Reserve’s monetary policy. There is less agreement on how long it will last, or how deep it will be.

An early August survey of nearly 200 members of the National Association for Business Economics found that roughly one-fifth of the economists surveyed said the U.S. is already in a recession and 47% expect a recession to begin by the end of 2022 or the first quarter of 2023.

“Overall, [survey respondents] are not confident that the Federal Reserve will be able to bring inflation down to its 2% goal within the next two years without triggering a recession," NABE Policy Survey Chair Juhi Dhawan said in a statement.

The shift away from office space has had a real impact on office markets nationwide. On the West Coast, software company Autodesk plans to vacate its San Rafael, California, offices in October and consolidate its workers — most of whom operate on a hybrid work schedule — in San Francisco.

On the East Coast, healthcare company Centene pulled out of its plans to move into an 800K SF new HQ building being developed for it in Charlotte, North Carolina. The company cited "a fundamental shift in the way people want to work" as the reason for not taking the new space.

The U.S. office market saw some softening in the second quarter of 2022, according to Newmark, with net absorption contracting for the second consecutive quarter. Despite improved public health conditions and the end of pandemic-related restrictions, office market recovery momentum has slowed, the report found.