Offices are a cost that most companies aren’t looking to increase after the pandemic. However, forking out for a high-spec space might come with an added bonus: employees will actually want to be there.
According to real estate boss Scott Rechler, the only offices to survive in a hybrid-working world will be those in the best locations or with top amenities.
Unfortunately for landlords with lackluster portfolios, Rechler—the CEO of New York-based RXR Realty—says the assets will become “obsolete.”
“Everyone’s been painting offices with the same brush. I’ve been saying for quite some time there are Class A offices that are going to continue to do well: we’re seeing people demand [it], people back to the offices.
“And then there’s Class B offices or lower grade, that is effectively going to become competitively obsolete,” Rechler told CNBC’s Squad Box.
The RXR chairman heads up a company that manages more than 30 million square feet of commercial property—valued at $21.2 billion—and said he’s seen an uptick in tenants in sought-after locations.
This month alone the company has signed up a million square feet in leases in locations like New York’s Rockefeller Centre, the Grand Central area and mid-town Manhattan.
“Those are places where people want to be. They’re high-quality buildings and high-quality locations,” Rechler added.
Data shows that across the past four weeks office occupancy in ten of the largest cities in the U.S. has actually declined—decreasing from 50.2% to 47.3%.
The data, compiled from 2,600 buildings in 138 cities monitored by Kastle Systems security software, shows areas like the Washington D.C. metropolitan area and the wide New York City area have seen decreases of 2.4% and 2% respectively.
However, this is up from the first weeks of 2023 when occupancy was as low as 20% across cities including Chicago, Los Angeles and San Francisco.
Offices have to be ‘compelling’
Unlike the likes of media titan Michael Bloomberg, Rechler implies that workers not wanting to go back to sub-par offices is understandable.
Earlier this month former Mayor of New York—and billionaire CEO of the Bloomberg group—wrote an OpEd in The Washington Post saying he was tired of “excuses” from Federal employees refusing to go back to their desks in the capital, adding the city had become a “shadow” of its former self.
Rechler on the other hand placed the focus more on employers, explaining: “If you’re trying to attract your workforce back the office you want to collaborate … and be in places that have energy, have amenities, places where people can gather together, you want them to be in neighborhoods that are exciting and [have] restaurants and bars.
“You want to create an environment that is compelling.”
So-called Class B offices on the other hand foster none of that excitement, Rechler adding these are often “dark buildings, [with] bad infrastructure, bad light, bad air.
“People don’t want to be in those buildings,” he continued.
Despite having a vested interest in getting businesses back to the office, even Rechler admitted that hybrid work is “here to stay.”
In three years’ time, Rechler predicts the average number of in-office days for staff will be three or four days, adding: “People like flexibility. Hybrid work is a good balance.“
That’s an increase on the current average of 1.5 days a week in the U.S.—with a 2023 study from Advanced Workplace Associates of 155,000 employees finding that U.S. offices are the most under-used on the planet.
What happens to the empty offices?
Landlords of Class B—and lower—properties are presented with a “challenge” Rechler added—and it could end up being a $1.5 trillion headache.
The eye-watering sum is the amount of U.S commercial real estate debt due for repayment before the end of 2025—and the billion-dollar defaults have already begun.
Building owners are also faced with problems if they try to utilize the space for another use like accommodation, with Rechler explaining the price of real estate needs to come down to $200 to $250 a foot for companies to make a profit on conversions.
Ultimately, banks and investors are the ones who will pay the price for the value of real estate declining, but the property expert added that city authorities may also suffer.
With reports of businesses asking for real estate tax breaks, Rechler questioned: “What does that do to municipal budgets? What does it to do local businesses? That’s a challenge.”