Senior Client Partner, ESG and DE&I Strategist
Return to Office: The Moment of Truth?
Even if their offices were mostly empty for the past two years, corporate leaders were stuck in them. Almost no tenants could use COVID-19 as a legal justification to get out of leases that typically run between 5 and 12 years.
That might be changing as the slow pace of return to office flies right into a massive wave of lease expirations. Leaders might be desperate to get out of pricey real estate deals, but to do so they’re going to have to figure out how many employees they want back in the office full-time, and how many can stay home or work hybrid. “It’s a moment of truth. That will lock in a reality,” says Andrés Tapia, Korn Ferry’s global strategist for diversity, equity, and inclusion.
About 243 million square feet worth of office leases—approximately 11% of the country’s total leased office space—is set to expire across the country this year. That figure is a 40% increase from 2018 and the highest since property manager JLL began tracking the data in 2015. This year won’t be an outlier, either: the volume of lease expirations is projected to exceed 200 million square feet annually through 2025.
At the same time, office occupancy—according to the weekly occupancy report from Kastle Systems, which monitors card swipes in office buildings—is still in the 40% range in some of the biggest markets in the country. But that average might understate the vast number of empty cubicles and conference rooms. Forty-six percent of companies are currently utilizing only half (or less) of their available office space, according to a recent survey from office-management software firm Robin.
How much office space is needed—and how much it will cost—is now being vigorously debated by office tenants and landlords. Before the pandemic, real-estate costs were between 3% and 9% of S&P 500 budgets in every industry but energy. “Everybody is using this time to negotiate, for sure,” says Darin White Eydenberg, a senior client partner and global head of Korn Ferry’s Real Estate Private Equity practice.
Even if many leaders could have made the decision to cut real-estate space in 2020 or 2021, at the height of the pandemic, they often held off, experts say, taking short-term lease renewals. They likely didn’t want to reduce space on the assumption that once the worst of the COVID era passed, employees would all be back in the office.
A mounting labor shortage, combined with the so-called Great Resignation, put the kibosh on that thinking. Millions of employees made career decisions based on whether they would have to work in the office. In a recent survey of Korn Ferry’s largest clients, one in five say they have not finalized their return-to-office plans. What’s more, leaders also have to figure out whether shedding their real estate would actually save them money that they need in this down economy. Few firms have figured out, at least in dollar terms, how much they’ve gained or lost in productivity with the advent of remote work. Plus, many firms don’t know how much a more remote workforce might cost: on the one hand, companies could rent smaller office locations, but on the other, they’d have to periodically fly in their employees, says Kristi Drew, a senior client partner and global account leader in Korn Ferry’s Financial Services practice. “Is that the question that CFOs are going to have to deal with, rather than just renegotiating their leases?” she asks.