LEXINGTON, Ky. — As residential real estate continues to get stronger, working from home and implementing hybrid schedules post-pandemic could significantly adversely affect the commercial real estate market. 

Nearly 100,000 businesses in America have closed since the beginning of the pandemic, creating many vacant offices and storefronts. As people begin returning to work, chances are they will be going into an office less often. Kentucky Chamber of Commerce President and CEO Ashli Watts said around 100,000 people had left the state’s workforce in the past year, and about 30% of jobs in the Bluegrass State are currently remote, which is a “huge shift” from even a year ago when the pandemic restrictions began and were more stringent. 

“I think most of them will be permanent work-from-home jobs in the future,” Watts said. “In Kentucky, we’re a little bit different because we’re a manufacturing state, so there were many, many jobs where you couldn't work from your kitchen table at home. I mean, if you're making cars or making something in a factory, you can’t work from home.”

Regus, a company that evaluates and provides professional workspaces, reports a decreasing number of businesses are using the traditional office model and reducing the amount of space leased per worker. According to Regus’ research, 54% of employees worldwide now spend half the week working somewhere other than their company’s central office locations. That research also shows the more popular reason behind the growth of flexible working, chosen by 61% of respondents, was the desire for a greater work-life balance after the pandemic.

“Many experts believe the traditional office’s popularity has already passed its peak,” according to Regus. “Financial pressures are increasingly driving companies to seek smaller, more flexible and cheaper offices.”

Regus’ research also shows that 61% of workers would actively change jobs to secure flexible working, and 93% would choose a company that offered remote working over one that did not.

“Companies know they’re going to have to be very creative, because there is the talent attraction piece where there are almost two jobs for every one person looking and so people are actively looking for jobs, right now, it's a good time to be in the job market,” Watts said. “Part of that draw is a better work-life balance working from home. I think you'll see companies almost be forced to let people work from home some, or they're going to lose a lot of the talent they have right now.”

Bill Menish is the owner, broker and managing director of SVN Menish Commercial Real Estate in Louisville. He said the commercial real estate markets in major cities such as New York, Los Angeles and Chicago might suffer from people working from home. Still, he does not anticipate the same trend in Louisville or cities of comparable size.

“I think there's this attitude that we all thought that everyone was going to work from home because we found out we could do it,” he said. “Now what I'm hearing is we're not getting as much done — there's not the team-building and exposure to other people’s expertise, and there is a push to get back to the office, at least that's the feeling I'm getting. But in Louisville, Ky., I don't think people working from home will hurt commercial real estate. I think we're going to keep an eye on the big cities, and if there's a prediction that the commercial real estate market will suffer because offices aren't being leased in the downtown areas, that's where it's going to happen. We're going to see a little bit of it here in Louisville, but it's not going to be dramatic.”

Online employment site Indeed now has a section dedicated to work-from-home jobs, and there are more than 250 listings for that type of employment in the Lexington area. In a sign of the new changes, postings are over twice as likely to mention “remote” compared to listings before the outbreak started, according to Forbes. The job site shows that in Feb. 2021, nearly 7% of job postings were remote compared to 2.9% in Jan. 2020, and job seekers are now “twice as likely to search for remote jobs” versus pre-pandemic times.

Menish cited retail businesses as one reason he believes the commercial real estate market will not decline in Louisville or much overall. As recently as this past January, he said the prediction was retail spaces would not survive the pandemic, but his firm has since sold multiple retail strip mall-type properties. 

“The last one we listed had so many offers within the first day of advertising that we decided to do what's called a ‘call for offers,’ where you pick one day and if you want in, you deliver your offer that day,” he said. “We had a significant number of offers, and we got almost the full asking price. Everybody was happy with the outcome. That's not office space, but it's the same impact or concern post-COVID, and it is not playing out as expected.”

Aside from in-state remote jobs, Watts said Kentucky has an opportunity to capitalize on attracting people who work remotely for out-of-state companies as well.

“It is kind of a good opportunity for people to be able to stay in Kentucky or move here but maybe work for a company that's out of state,” she said. “We thought we might be able to attract some remote workers here because of our low cost of living, our geographic location, etc.”

Even as vaccinations progress, workers have been slow to return to an office, according to an article in The Economist. In early May, just 1-in-20 buildings in America had occupancy levels above 10%. With the return to work just beginning, stimulus still in place, and long leases yet to expire, the extent of companies’ overall financial losses remains unknown.

“Office property has been dealt a blow by COVID-19,” according to the article. “A price index based on appraisals, calculated by Green Street, a research firm, is 9% below its pre-pandemic peak in America. The share prices of real estate investment trusts that invest in offices remain 13% below their level in early 2020. Central banks are on the alert. The reliance on commercial property on debt financing means a downturn could have nasty repercussions across the financial system.”

To justify owning or renting office space, many companies have adopted a model that allows employees to work from home and in the office.

“What we’re seeing is that a lot of employers are offering what we now call hybrid workplaces, where you would work two or three days in the office two or three days at home, and kind of make that schedule, because it is about the talent attraction,” Watts said. “Businesses want to keep their workers right now — workforce issues are the top priority of every employer in Kentucky — so the hybrid model is what we're seeing being the most popular because I think we all know we can work from home. What businesses have realized over the past year is that collaboration of just being together and being in a group setting has been lost a little. I think the hybrid model is probably what's going to work best for a lot of workplaces.”

Insurance provider Humana, which has its headquarters in downtown Louisville and two offices in Lexington, occupies a lot of commercial real estate in Kentucky. If that company, for example, chose not to return to the traditional office model, it would create a lot of vacant office space in Kentucky’s two major cities. Company spokesperson Jahna Lindsey Jones said the company plans to have its offices fully operational after Labor Day and will be flexible with employees’ needs as they will have the option to “reenter the workspace” at that time. 

“Humana and others where people had primarily desk jobs where most of your work happened on a computer, even before the pandemic, are moving toward the hybrid model,” Watts said. The pandemic obviously sped that up. I think with buildings like that, though, and being downtown, it will take some time to adjust and see where they're going to land. I do see, for the time being, downtowns all across the country, not just in Kentucky, are going to be less populated because people will be working from home.”

Menish said another reason he feels as if the market will stave off decline is creativity. A developer he often works with has implemented a post-pandemic concept and is currently looking at multiple projects. 

“It is a simple concept of multiple two-story buildings in an office park with somewhere between 1,500 and 2,000 square feet per floor and an elevator, but you're only sharing the elevator with the people you work with because that's who's getting on the elevator go to the second floor, and the rest of them are going right into the first floor,” he said. “He's doing this to try to combat post-pandemic fears. It’s an interesting plan, and developers are considering how we work around these potential problems.”

Working from home, post-pandemic fears and unrest are some reasons Menish said could make businesses relocate from or not locate in a city’s downtown, but that does not necessarily mean they are not using office space.

“We're quickly filling up the places around Jefferson County and in other counties, possibly because of the lack of desire for being downtown,” he said. There's a big desire for getting back to normal and getting businesses going. Entrepreneurs have had a lot of money on the sidelines and are getting into the game with new opportunities as well. So, we do not see a negative impact so far here in Louisville.”