This is the third in a series of articles that examine the truth behind the negative headlines. The first two articles are “CRE Experts Say ‘Not so Fast’ to Doom-and-Gloom Office Headlines” and “Experts: Upgrades Help Offices Generate Demand.”
Anyone googling the term “real estate doom loop” will receive many gloomy hits with similar themes. The doom loop is threatening cities. The doom loop spells trouble for financial institutions. The doom loop could spur the next economic apocalypse. And so on.
The factors supporting this include continued remote work and increasing office vacancies.
As previously mentioned, the office sector isn’t running on all cylinders. Nor is it in danger of total collapse. Experts tell Connect CRE that the doom loop generates colorful copy. But it’s overblown regarding what’s happening with remote work and the office sector.
The Dawn of “Doom”
The doom loop theory originated with Stijn Van Nieuwerburgh, a real estate and finance professor at Columbia University’s Graduate School of Business. In a paper he penned for the National Bureau of Economic Research (NBER), Van Nieuwerburgh suggested that the rise of remote and hybrid work would have a dire impact on the office sector. Fewer employees coming into the office would mean increasing vacancies while decreasing new leases and lease renewals. This, in turn, would empty business districts. Retailers and restaurants would serve fewer customers, meaning vacant ground-level retail. The result would be a ghost town of empty high-rises and boarded-up retail shops.
The doom loop (in theory) also spells trouble for cities. Fewer businesses operating in business districts would mean less tax revenue and a cutback in services (like police and fire). Because of this, these business districts would be vulnerable to crime, meaning no firm would want to hang their shingle there.
That’s the doom loop story. But the reality is somewhat different. “Everyone jumped on the bandwagon that office is dead, but it ain’t dead,” remarked Citadel Partners’ Scott Morse. “It’s transitioning and evolving.”
Employees ARE Returning
Another reality is that employees are returning to work.
Certainly, during much of 2022 and early 2023, companies began pushing back-to-the-office mandates while workers pushed back, demanding a remote arrangement versus a full-time in-office presence. In recent months, companies demanded that employees return to the office or risk being fired.
Even with this stance, the five-day office week could be a thing of the past, according to CNBC.
“The pandemic showed employers that flex schedules can work and are appreciated by employees,” said Aarica Mims with KDC. “But company culture and in-person collaboration are still key to a company’s success. That involves bringing employees together, whether five or three days a week.”
What about the employee pushback? That seems to be ebbing somewhat. “Many of those who favor remote work also cite feeling lonelier and more isolated,” CREXi’s Eli Randel pointed out. “It’s likely that people will increasingly return to the office, even through a hybrid arrangement.” Randel went on to say that this would help with office space. “As some outdated supply is taken offline or converted, the supply-and-demand curve will find equilibrium again,” he said.
Location, Location, Location
Another issue with doom loop commentary is that it tends to focus on East and West Coast gateway cities. But the experts explain that “doom” amid the office sector and urban locations is overblown when drilling down regionally.
In discussing the South Florida region, David Martin with Terra Group explained that “the office sector will continue to perform well and outperform the other major U.S. office markets.” Out-of-state companies are coming to the area, while “major corporations are generally requiring a return to the office, albeit providing some flexibility,” Martin said.
Meanwhile, MDL Group’s Hayim Mizrachi pointed to Las Vegas’ very low office supply, steady demand population growth and shorter commutes, all supporting a fairly positive office market. “We can travel from north to south, east to west within 45 minutes. Most commutes are 15 to 20 minutes or less,” he said.
Finally, Tony Russo with Lee & Associates acknowledged the Chicago area’s volatile leasing activity, especially in the suburbs. However, leasing “bounced back considerably in the second quarter of this year,” he noted.
It’s About the Cycle – and Flexibility
Additionally, anyone who understands the real estate cycle knows there are ups and downs, and office is on the downside right now. “Office cycles tend to occur every decade or so, albeit some more pronounced than others,” Randel said. “Shortly following 9/11, people believed no one would want to rent in a skyscraper again.”
Nowadays, landlords are upgrading spaces and improving building operations, which is vital for staying current with tenant demand. “The ‘doom loop’ mainly exists for those owners and property managements who continue to say ‘this is how we’ve always done it,’ and don’t see the need for any change,” said Ira Singer with Mosaic Construction.
Russo agreed, pointing out that today’s companies require smaller footprints and shorter lease terms. “Landlords should adapt to these new standards,” he added.
No one denies that the office sector is undergoing much change. But the experts also suggest that remote work is far from the catalyst that will lead to empty high-rises, shuttered ground-floor and crime-infested cities. Employers are standing pat with back-to-work mandates. Yet many also recognize that the five-day workday is likely a thing of the past.
“Most business owners know hybrid work is here to stay,” Russo said. “As their pre-COVID leases start burning off, we’ll see a lot of leasing activity.”
KDC’s Mims agreed, suggesting that the new arrangement would shift the office’s role rather than demolish it. “At the end of the day, office is not going away,” she said. “It will look slightly different as the footprint shrinks, more amenities are added, and workspaces conform to a flexible workforce.”