Stakes Are High For A Mass Return To Work As Tenants' Plans Remain Mixed

Frustratingly little clarity has emerged around how much the rising prevalence of remote working will affect the office market as billions upon billions of dollars hang in the balance.

A laundry list of major companies has publicly stated plans to reduce their global office footprints, including the corporate divisions of retail brands REI, Nordstrom and CVS Health, CNBC reports. CVS and Ralph Lauren both plan to cut as much as 30% of corporate office space while Nordstrom and REI have both backed out of headquarters space in the Seattle area.

Cloud software management company Salesforce, which has sought large blocks of space in cities around the globe even as it remains San Francisco's largest user of office space, has backed out of a commitment to lease 325K SF at a yet-to-be-developed tower from Hines near its global headquarters, Business Insider reports. 

The implications for a widespread decrease in office usage could be dire. In a scenario wherein the average office-using employee works from home one-and-a-half days per week, only 4.4% of CMBS loans backed by single office properties would retain their rating, according to a stress test by Fitch Ratings. Fitch considered that scenario a moderate level of stress, which would cause a permanent 10% drop in office demand and an average 15% decline in net cash flow.

In the severe stress scenario wherein 40% of office-using workers remain at home on any given day, the average valuation for single-asset CMBS loans would drop by 54% from where it was at origination. As many as 55% of such loans would drop below investment-grade, Fitch projects. 

Somewhat counterintuitively, the same tech companies that spearheaded the drive to allow working from home have been the biggest source of new office leases in core urban markets. The tech sector accounted for 24% of all new leases in 2020, according to CBRE research. A separate CBRE survey found that 40% of the commercial real estate services company's clients had not made any plans to return to their offices as of January.

Overall, office occupancy has crept up slowly and in fits and starts in major cities across the U.S., according to Kastle Systems, which makes keycard-based entry systems for office buildings and measures data from keycard swipes for its reports. Across 10 of the country's largest office markets, worker occupancy remains a shade below 25%, according to Kastle data.