Layoffs across the tech industry are adding further uncertainty to a U.S. office market already grappling with record job openings.
Since the beginning of this year, companies including Microsoft, eBay, Google, Instagram, Salesforce, and Amazon have distributed more than 24,000 pink slips in total to help manage expenses and reallocate capital investment budgets.
The move comes as some tech companies say they are shifting investment priorities to focus on artificial intelligence and changing the way they calculate how office space is valued, industry analysts said. . moreover, Domestic office market is already facing an unprecedented surplus of vacant and unneeded space, creating a challenging environment that is pushing vacancy rates to record highs.
The full impact of the approximately 440,000 total position reductions since 2022 on office demand is yet to be determined, as the market reacts to other changes related to the pandemic, such as the rise of remote and hybrid work. do not have.Yet, although still not fully recognized, the link with downsizing And commercial real estate is becoming more and more obvious.
Colin Jascoci, executive director of CBRE’s Tech Insight Center in San Francisco, told CoStar News there is “a connection” between layoffs and empty space. “It’s not as obvious or direct as you might think, and of course hybrid work and remote work are having a much bigger impact on office needs than traditional layoffs. But in reality, “We’ve seen a lot of sublease space coming from tech companies that have reduced their office footprints, primarily related to hybrid and remote work, but also partially related to headcount reductions.” There is. ”
The tech industry led all sectors in the number of job cuts announced last year, according to the report. Recent tracking data From out-employment support company Challenger, Gray & Christmas. The company said layoffs in its technology sector more than doubled from a year earlier in the first 11 months of 2023, as companies made an unprecedented number of layoffs.
According to Yasukochi, tech companies are also responsible for up to 25% of the total available office space for sublease in the country, with a significant portion of this largely the result of companies that had excess space in their real estate portfolios before the pandemic. An economic situation that never fully materialized.
“Many people expected when they rented the space that they would be in the office on a regular basis,” he says. “Those things didn’t happen, so they didn’t fill a lot of that office space. The changed dynamic is that every time a new job is created in the future, the office space required for that role is less than in the past. It means there will be less.”
This new thinking upends the standard equation in which office tenants have calculated the space they need based on the number of employees. While some companies are now disposing of space and downsizing previously large real estate portfolios in pursuit of efficient growth, this move is one of the industry’s largest office transactions in 2015. This is in stark contrast to the spirit of “expanding at all costs” that has dictated some of this. 10 years before the coronavirus outbreak.
To be clear, there is no guarantee that layoffs will continue, and there are predictions that employment will recover in the coming months.
By the end of 2020, the tech industry accounted for about a fifth of all office leasing activity in the country, according to CBRE data, including companies such as Facebook parent company Meta, Apple, Microsoft and investment platform Robinhood. This includes major companies. invested in the idea that the office would play a key role in the future of work.
Tech companies were some of the nation’s largest sources of leasing and acquisition activity before the pandemic, sourcing hundreds of thousands of square feet of land to accommodate long-standing growth in workforces, primarily workers commuting to offices every day. Was. These global tech companies accounted for more than a third of the nation’s 15 largest office leasing companies in 2019, according to CoStar data. The total area of deals made by Google, Amazon, Apple, Meta, and others exceeded 5 million square feet.
However, as 2022 arrived, the pandemic-driven growth streak for technology companies slowed. Pressure from rising interest rates, declining advertising revenues, and an uncertain economic outlook has led many companies to freeze hiring, eliminate unrelated positions, and prioritize profitability over riskier investments. Ta. These factors combined to slow rental demand, which was already weak.
“Historically, the primary driver of office demand has been job growth,” said Phil Mobley, national director of office analysis at CoStar. “What has happened since the pandemic is that relationships have changed and tensions have increased.”
So far, the relationship has managed to sustain the market’s downside, although Mobley said this is still under consideration. In other words, in early 2020, approximately 2.5 million office workers lost their jobs within two months, leading to an increase in vacancies and an extended period of time for tenants to return their space.
“To that extent, the relationship continued,” Mobley said. “But on the positive side, we haven’t yet found a place for that relationship to take root again.”
From 2021 to 2022, the country’s economy recorded more than 5% annual employment growth, particularly in office-based jobs that traditionally required a certain amount of physical work space. While employment growth over the past two years may have been more than double the numbers reported in the decade leading up to the pandemic, Mobley said office tenants signed up for more space than they did. He said it was only for a “very short period of time.” He was happy to let go.
“There’s an interesting but uneasy equilibrium going on right now, where layoffs, retirements, and hiring are all fairly low, especially in the office-use sector, so much of the cost savings is moving into real estate.” Tech giants cut real estate costs are doing. Mobley said. “Even if the situation changes and news of layoffs becomes more than just a headline, we cannot expect it to help office demand.”
The link between layoffs and real estate decisions has not yet been formally established. In any case, moves by companies to delay hiring or cut dozens, hundreds, or even thousands of positions are expected to play a key role in the slow recovery of the domestic office market. There is.
Additionally, efforts to measure the direct impact of recent layoffs on future office markets are further complicated by efforts by some tenants to reduce unrelated real estate costs to avoid layoffs. Mobley said.
Let’s take Amazon as an example. This Seattle-based giant has cut more than 25,000 employees in the past few years, and most recently, in early 2024, it cut 500 positions. across streaming, feature films, and Twitch businesses.. The layoffs come at the same time as the company continues to shrink its global office footprint, cutting hundreds of thousands of square feet of office space and halting construction on a number of high-profile office developments last year. The company claims that the decision to reduce staff had the following impact: There was no real estate related impact.
“The change in physical footprint is not a result of or indicative of a role elimination,” an Amazon spokesperson told Coster News.
Rather, pausing construction work and realigning physical workplace footprints is an opportunity for companies to assess how efficiently they need to use the space they have and to design new projects as “as appropriate as possible.” It’s an opportunity to assess what you need to make sure you’re building with, or as close to appropriate as possible.
But layoffs may ultimately be just part of the evolution of the post-pandemic office market, with some predicting a return to job growth in the second half of this year. Yasukochi said signs of this are already emerging, especially among companies scrambling to take advantage of the expected AI boom.
CBRE executives said the potential for AI to stimulate demand for physical office space “could spark a new wave of growth in the future.” “While it may not be immediate, many technology companies are prioritizing projects to cut excess costs and refocus on growth areas, and AI is one of them.”
But whether that’s enough to make up for years of losses and tenant attrition remains to be seen.
“There is still excess capacity in the system as it relates to the office portfolio,” Yasukochi said. “We may see more hiring in the second half of this year, but that doesn’t mean office demand will pick up right away.”