In this episode of Lehigh University’s College of Business ilLUminate podcast, we are speaking with Loren Keim about the future of office space in the U.S., as companies are grappling with whether to require employees who have been working remotely to return to the office.

Keim, who earned his undergraduate degree in management and his MBA at Lehigh, is a professor of practice in the Perella Department of Finance’s Goodman Center for Real Estate. He teaches Case Studies in Real Estate as well as the two-semester Real Estate Practicum. He is also an author of real estate “How to” books, an international speaker, and the owner of Century 21 Keim Realtors, with more than 90 brokers and associates in Eastern Pennsylvania and New Jersey.

He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript

Jack Croft: At the start of the COVID 19 pandemic in March 2020, millions of American employees were abruptly forced to transition to working from home. Lately, there has been considerable speculation and prognostication about how many of those employees will return to commuting to an office full-time in the near future. Based on what you’ve been seeing and hearing in the real estate industry, what do you think is the most likely scenario for how things go?

Loren Keim: One of the things that we have in a lot of podcasts where we have panel discussions over the past two years have been those brokers that are tracking what percentage of office workers are coming back into the office. And we’ve heard numbers within the last year as low as 6% in some very large buildings up to maybe 60%. And that’s about the highest number we’ve heard.

But it’s going to be hard to say what’s going to happen exactly in the future because, frankly, many of these leases are 10-year leases. And many of these large companies are not going to walk away from them. As they finally end, we’ll see whether or not they reduce space. But just like everything in life, there are two competing viewpoints. And there’s research going on all over the place on whether or not remote work or hybrid work has been effective depending on the source of the study.

I’ve had conversations over the past few weeks with experts that claim that employees working remotely has dramatically increased production as they tend to work longer hours and don’t have the commute time. However, I’ve heard just as many complaints from management of firms that workers are far less productive, and in fact team activities slow dramatically. It’s hard to get them together and get them working. There are exceptional cases on both sides, of course. But while some people can work effectively remotely, there are others that get sidetracked by kids and the television, the refrigerator, and everything else that’s part of the home.

I do believe there’s always going to be a component, or at least for the next decade, of remote work. But I also think we’ll be seeing some substantial return to the office environment probably in a hybrid model over the next few years for a few reasons. A couple of things that stick out that we’ve noticed that have become problems with the hybrid model. Young people tend to move to gateway cities like New York or Chicago or Miami for many reasons. They like the excitement, of course. But they also like the flexibility of being able to change from one firm to another if they are unhappy or if they get a bump in their salary. And it’s easier to do that in an area where there are several competitors existing. That doesn’t happen, unfortunately, in smaller suburban markets. In fact, firms like Google, Microsoft, Facebook or Meta, I guess it’s called now, locate large facilities in New York in order to tap into that talent pool rather than requiring the best and the brightest young minds to move to the West Coast. And that benefit goes away if there’s no one coming into the office.

The other issue I’ve heard from students who have graduated is that they’re having difficulty learning in corporations where everything’s remote. And it’s harder to bounce questions or ideas off people that are in the firm. That’s part of the learning process when you first get into a firm. So that’s been a bit of a challenge as well.

But I do know that every survey I’ve seen has most employees preferring a hybrid model or at least a component of working at home as part of their job. So I think, going forward—particularly in this environment when we’re in a worker-driven environment because we’ve got such a shortage of employees—that they're going to dictate the ability to have some sort of hybrid model in place.

Croft: If companies do wind up adopting some form of hybrid work solution, at least in the short-term coming up, what does that do to the demand for office space for companies? What are some of the problems that would create for them?

Keim: Obviously, it creates more open space that's not being used. And we're seeing this heavily in the major cities like New York, where there is space that is leased, but it's not necessarily occupied. New York City had a net absorption year-to-date as of the end of July of negative 4.7 million square feet. Over 2 million negative absorption just downtown. And that's with leases expiring and not being renewed. That's a real problem going forward to have all that extra space.

But if the solution is a hybrid model, it still means there's a need for office space, just not as much. And the question is whether or not people will be sharing the same space if they come in two or three days a week. In some firms, the space may be redefined similar to a WeWork or shared office model with different levels of employees able to use whatever open space, open private office, or open cubicles available on that particular day. That would certainly decrease the need for office space.

In shared space, we're seeing a lot of this happening in suburban markets. Subscriptions are sold for shared desks. And the owners are able to actually oversell them because the tenants are only in a fraction of the time. It's rare they hit capacity.

The nice thing is, for the employees, they can come in when they want to. For the landlord of the building, they're able to actually collect a higher form of rent. If you're renting 10,000 square feet to a firm, you might get a certain dollar per square foot. If you're taking that same 10,000 square feet and renting it to 80 different firms that are sharing that space, you actually get a higher price per square foot. Again, you can actually oversell it a little bit. The downside to that is, of course, you're putting what used to be in a larger square-foot footprint into smaller space in these shared offices, meaning you're leaving a lot of space open. And that's where the problem is going to come in for the real estate market and office in the long run.

Croft: Is there anything we haven't talked about that you think our listeners should know about the future of offices?

Keim: I think the only other thing that comes to mind is that office space workers are looking for healthy space if humanly possible. It's a major trend right now. We're seeing more companies putting air exchange systems in to bring that constant flow of fresh air in to, hopefully, prevent future infections. Which, by the way, is not great for heating and cooling, but it keeps constant air flow anyway. We're seeing computer-controlled bathrooms to let maintenance know when to clean. We're even seeing companies that have apps on their phones that let you know if someone in your department was sick so that you can get yourself tested. So I think that sort of thing, even though it's not exactly office space related, is something we are going to see more and more of in the future.

Loren K. Keim

Loren K. Keim

Loren K. Keim is a professor of practice in the Goodman Center for Real Estate in the Perella Department of Finance at Lehigh Business.