Good News For Investors—Commercial Real Estate is Finally Catching a Break

The work-from-home phenomenon—incorporated during and after the pandemic—may be ending as more companies demand that workers return to the office. That’s good news for both corporate and residential landlords.

Amazon called its staff back to a five-day workweek at the end of September in an effort to maintain company culture and tilt dynamics back in favor of the employers. Dell Technologies, Google parent company Alphabet, Apple, and even Zoom have mandated that workers return to the office full-time, ditching hybrid models.

The data presents a paradox: According to Forbes, PWC’s 2024 Trust Survey found that 93% of business executives say building and maintaining trust is critical to the bottom line. Yet only 20% of employees trust their company leaders to do the right thing. 

Return-to-Work Mandates Are Oxygen For Gasping Cities

While employees might loathe the commute, having to wear office clothes, and micromanaging bosses, for cities left gasping by the lack of employees in buildings, on transportation, and patronizing local businesses, the injection of workers back into the mix is like oxygen in a collapsed coal mine.

Office landlords, however, are still in trouble. In September, the delinquency rate of office loans converted into securities increased to 8.36%, the highest rate since November 2013, according to data firm Trepp. Generally, though, things have stabilized from the cliff-face drop into the abyss that many feared would beset major American cities, and banks have started to lend again—good news for everyone involved in a city’s real estate ecosystem.

A city’s infrastructure depends on its tax base, much of which comes from big office buildings. Those taxes go to all essential departments, such as sanitation, law enforcement, and streetlights. This revenue also affects landlords of residential buildings throughout cities and their outer boroughs. These buildings become less attractive to tenants if essential services are not maintained.

Working from home also takes rental dollars out of landlords’ pockets and gives them to far-flung destinations, often overseas. With the advent of a return to the office, the demand for apartments has increased.

Amazon’s Upcoming Return-to-Work Mandate Has Already Impacted Seattle Real Estate

Equity Residential said in an October earnings call that it is seeing a pickup in leasing in Seattle from Amazon employees, who are renting apartments ahead of a five-day in-office mandate that begins in January. Expect this phenomenon to be replicated around the country as working in an office becomes the norm again.

The Cost of City Living Is Still Unaffordable

Despite the return-to-work mandate, the bottom line is that cities are still unaffordable for many employees, and not all offices that were vacated during the pandemic will be filled. According to MoneyGeek.com, there are now 57 U.S. counties that are no longer affordable, topped by Sacramento, California, and Boston, while others include Ada County in Boise, Idaho, and Travis County, Texas.

Working from home was a respite for inhabitants of many of these areas because it allowed them to move to cheaper, more affordable areas while being able to keep their jobs. Returning to the office will put immense financial stress on many people, and landlords will have to contend with this. 

High-earning executives who can afford to live in the cities will tend to own rather than rent. However, for lower earners, such as essential city workers like first responders, teachers, and government employees, landlords could consider a number of solutions. 

Office-to-Residential Conversions for Co-Living Spaces

According to Pew Research, the United States has a shortage of 4 million to 7 million homes and an all-time-high office vacancy rate of 20%, meaning that over 1 billion square feet of office space is unused. The Pew Charitable Trusts and Gensler, a global architecture, design, and planning firm, has revealed that by converting office space to co-living dorm-style apartments featuring private, locked “microunits” along the perimeter, with shared kitchens, bathrooms, laundry, and living rooms in the center, conversion costs can be dramatically reduced, proving a win/win for landlords and tenants alike.

Concentrating the plumbing and kitchens in the center of each floor (where they usually already are in offices) rather than in each unit can save 25% to 35% over conventional conversions. Gensler projected the total cost to build a co-living building in Denver at about $123,000 per unit, as opposed to $400,000 for a studio apartment in an affordable, low-income building. In addition, co-living developments are eligible for people with federal Section 8 vouchers, reducing homelessness.

Single-Family Homes to Co-Living Spaces

City municipalities are signing on to co-living, dispensing with occupancy limits to manage the affordable housing crisis. That means investors looking to maximize cash flow from a single-family home that might not qualify for a short-term rental could reimagine it as a co-living space with a minimum 30-day stay. Some places insist on a minimum 12-month lease or, in the case of St. Petersburg, Florida-based Docked Living, a subscription model instead of a lease. 

The amount of construction an investor is willing to undertake (adding en suite bathrooms to each bedroom increases rent significantly, compared to shared bathrooms) will determine the rent they can charge. Most importantly, however, zoning laws do not have to be changed to convert single-family homes into co-living accommodation. An attractive feature for tenants is the fact that utilities are included, as well as monthly cleanings throughout the premises.

Final Thoughts

The return-to-office mandate makes sense for companies looking to boost productivity and a company ethos. It’s also good news for office landlords, cities, and local businesses.

For residential landlords in and around cities, the increased number of people looking for accommodations will also be a net positive. However, the affordability issue in cities means that simply expecting returning workers to shell out sky-high rents might be wishful thinking. Instead, creative thinking and retooling rental scenarios to maximize space and charge by the room might be a more realistic way to proceed.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.