Questions arise for commercial real estate market on companies opting for return-to-work mandates

“To return or not to return” is the question facing the office sector, not just in New Hampshire but across the entire country as we move past the pandemic. There is no easy answer.

Before addressing the question, it’s imperative to evaluate data about the greater Manchester office market — where the largest concentrations of quality office space are in the market in Bedford, the Manchester Millyard and the downtown central business district.

When analyzing vacancy rates between Q3 2019 (pre-pandemic) and Q3 2023, Colliers data — of office buildings 10,000 square feet and above — showed that, somewhat ironically, the vacancy rate in Bedford climbed 4 points, but asking rents also increased.

This submarket has several Class A office parks, and seems to benefit from the “flight to quality” when there are market disruptions. Office users are willing to pay higher rents to be there with all the nearby amenities.

In downtown Manchester, which consists primarily of office towers, vacancy went down almost 2 points, and rents here also increased, by almost $1.40 per square foot.

(Data is based on what the building was at the beginning of 2023, as some buildings are in the process of conversion to apartments, and that will likely impact vacancy and rent rates once we start our 2024 tracking.)

The Manchester office market has been relatively stable since the pandemic occurred, but it is still difficult to find the right space at the right price.

To return, or not to return?

Several interrelated reasons exist for not returning, or perhaps returning less than full-time.

Technology. Zoom existed prior to the onset of the pandemic and allowed many businesses to proceed as usual, even if the employees were not in the office. Some would argue that using technology remotely fosters greater efficiencies and productivity. Employees save time (and stress) on their commute and less time is “wasted” on the interruptions that are a normal part of being in the office.

Leverage. The pendulum swings with respect to the relative leverage employers or employees have. For several years prior to COVID, most employers were having a hard time finding employees, no matter the business. We’ve heard of the “great resignation” that accompanied the pandemic, and that made the problem worse. With employers desperate for workers, many have found that they need to cater to the employees’ desire to work remotely.

Quality of life. For many office workers, the commute and demands of the workday impacted their quality of life, especially those with young children. As workers got used to remote working, there was a growing sense that working remotely provided a better life than the “rat race” of working in an office.

Health concerns. COVID was a frightening experience, and many employees were justifiably concerned for their own health, especially those who are compromised. Working in a place with several people is an issue for many people, and employers cannot take this lightly.

Reasons for returning to the office may include:

Human interaction. It’s been found that most people feel that face-to-face human interaction is superior to remote video interaction. When you are around co-workers, you naturally talk about work and personal matters, and it builds a connection that goes beyond the “business” of a Zoom call. And having several people in a room to brainstorm, with whiteboards, also results in a whole that is greater than the sum of its parts.

Company culture. One business owner said she has been holding quarterly three-day inperson meetups with remote employees, and the energy from those meetings lasts a week or so, then they have to create it all over again in three months. She leased a smaller office space than the company previously had, and plans to offer most of the in-office social events they had pre-pandemic as a way to bring the employees together.

Succession planning. It’s important for business owners thinking about who will slide into management and leadership positions to be able to observe them in person, and the inability to do so may foreclose advancement for those who work remotely.

Employers deciding how to approach this conundrum will have a significant impact on the commercial real estate market, especially if they reduce space. That will impact many leases coming up for renewal, and that will in turn impact the financing on office buildings, a lot of which is also coming up for rate reset, at significantly higher rates.

Dan Scanlon is a senior associate at Colliers in Manchester.