Commercial real estate preps for the workplace of the future

It’s been four years since COVID-19 began emptying office buildings worldwide, and the commercial real estate sector is still feeling the fallout. Higher interest rates, waning demand for office space, and empty, difficult-to-convert office towers are among the challenges the market faces. 

Those same trends present an opportunity for the sector to adapt to how people want to live and work today. 

At the 2024 MIT World Real Estate Forum in June, industry experts offered their perspectives on the sector’s opportunities and roadblocks. They suggested ways that commercial real estate could be reimagined to provide more flexibility — encompassing everything from shorter lease terms to office spaces designed with the help of artificial intelligence. 

“People went home four-plus years ago; many of them never came back. Those that [did] are showing us that they want completely different things,” said Dror Poleg, an economic historian and author of the 2019 book “Rethinking Real Estate.” 

“The restaurants are full, the hotels are full, the venues are full. Just the offices seem to have a problem, and housing seems to have a problem in terms of accommodating people where they actually want to be,” Poleg said. 

Amid an environment where about a fifth of U.S. office space remains empty and commercial real estate prices overall have tumbled by 11% since March 2022, the panel — moderated by James Scott, director of the MIT Real Estate Transformation Lab — looked for bright spots. 

1. Mixed-use buildings are thriving.

One big challenge is that the office buildings of the past are not fit for the future, said Benjamin Breslau, chief research officer at Jones Lang LaSalle, a provider of real estate and investment management services.

“There are probably too many of them, and some percentage, we’ll find out, are somewhat obsolete, either from a modernization, sustainability, technology, or a location perspective,” Breslau said. “Those things are hard to change, especially in a world where the cost of capital is high and capital is not looking to flow into office buildings.”

Conversely, mixed-use commercial real estate — which combines commercial and residential — is thriving in areas such as Newbury Street in Boston’s Back Bay, a formerly residential area where there’s more structural flexibility than, say, in an area with multiple office towers. 

“A lot of our clients are telling us right now they have offices in the right cities but in the wrong neighborhoods,” said Breslau.

He predicted that more people will want to work and live somewhere that feels like a community and said that mixed-use environments can help achieve this.

With sustainability a priority for many companies these days, mixed-use buildings are being touted for their ability to help the environment by reducing commute times. However, Jinhua Zhao, professor of cities and transportation at MIT, said that it’s important to consider how the hybrid mindset can contribute to carbon emissions as it relates to the buildings themselves. In a “work everywhere, anytime” environment, electricity is usually on both at home and in the office, whereas before and during the pandemic, it was mostly one or the other. 

“People love flexibility, but we have a huge price to pay for it,” Zhao said. 

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2. Artificial intelligence will alter the office market. 

AI is poised to replace or dramatically alter the need for buildings full of office and administrative support workers — “the office full of insurance claim processors in Tampa [or] lower-cost places where labor is more abundant and less competitive,” Breslau said. 

On the upside, “I think you’re going to end up with a much more creative envelope for the in-person work that is done in those offices,” Breslau said. Whether people gather to solve problems or innovate, “you could see a place in the future where the only office that’s left is the creative office, where people are doing more human things.” 

Breslau said he expects AI to play a leading role in designing office spaces where humans can gather, be creative, and solve problems. For example, AI can be used to help design an office space with a layout that can enhance collaboration.

“AI should help us with this: How do you think about creating within a building, and within a neighborhood, the pockets of spaces, experiences, technology, and collections of people that enable people to do their best work?” Breslau said. 

3. Restrictive zoning rules are hindering innovation.

Zoning rules at the city level stifle development for both residential and commercial real estate, making it hard for businesses to expand and adapt to changes in the market, Poleg said. 

He suggested that cities should loosen their zoning rules so that developers can build what the community wants, including the ability to offer businesses shorter-term leases on office space.  

Poleg also said there is still demand for the co-living and co-working building model attempted by WeWork but noted that “it’s almost impossible to make money providing that type of product” right now. 

“One of the reasons that it’s hard to make money from it is that both our building codes and the whole financing ecosystem just cannot accommodate these things,” Poleg said. Whether it’s too expensive or takes too long to create, “we need to figure out how to accommodate that flexibility, because this is what our economy needs,” he said. 

4. Omnichannel retail remains a challenge. 

While office vacancies are struggling, retail is thriving. Only 4.7% of retail space is currently available for lease, the lowest level ever recorded, according to the National Association of Realtors. 

During the pandemic, many omnichannel retailers did well as businesses beefed up their online operations, but “this is now starting to come back to bite some of them in a certain way,” Breslau said. Omnichannel isn’t just about improving the digital experience; it’s also about satisfying customers in brick-and-mortar locations — something that is proving to be a challenge for some businesses.

“If you go into a Starbucks these days, and you’re trying to enjoy the experience in the Starbucks, and you have the mobile orders and the in-person [orders] — it’s total chaos now,” Breslau said. “This blending of digital and physical, of remote and in person, of productivity and also experience are things that I think will take some time to play out.”

5. The office of the future is more a network than a place. 

Looking to the future, Breslau predicted that the world of work is going to be much more dynamic. “I do think, still, there will be quite a bit of work that can or should be done in person together, and that’s using the term ‘work’ broadly,” he said.

Along those lines, Poleg said he believes that the offices that will be successful are the ones that echo what WeWork’s overarching goal was: to have a branded network that gives people the freedom to book whatever they need (such as a full office or a desk) and access whatever they need as their business or job demands it. 

“I think this is the office of the future,” Poleg said. “The story here is not about whether you’ll work from your bed or work in an office. The story is that work is getting distributed [and is] popping up in all sorts of places closer to people’s homes — in new types of towns, different parts of the city, and in different types of buildings.”

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