Industries Reliant on Thriving Downtowns Suffer From Remote Work

Pain from the anemic return to the office is spilling over into architecture, construction, cleaning, brokerage, furniture and other industries that depend on thriving downtowns.

During good times, these firms generate tens of billions of dollars in revenue from the sale, development and leasing of U.S. office space. But the businesses, which employ tens of thousands of workers, are now shrinking owing to the pandemic-era sea change in office-space usage.

Some companies in the office-industry ecosystem are contracting, laying off workers or even going out of business. In New York, for example, Henegan Construction, which has built office-interior space for tenants such as Morgan Stanley and the Ford Foundation, has laid off more than 50 workers, according to a filing with the state Department of Labor.

Steelcase, one of the world’s largest manufacturers of office furniture, last month reported $751.9 million in revenue for its most recent quarter, down from $824.3 million during the comparable period in 2019. The Grand Rapids, Mich.-based company has taken numerous cost- and workforce-reduction steps, including closing a regional distribution center in Atlanta.

“There are still a lot of companies that are taking a different approach or a more relaxed approach about getting people back in the office,” said David Sylvester, Steelcase chief financial officer, on a June earnings call.

It isn’t clear how many jobs are affected by the troubled office sector because many companies are able to pivot from office to other real-estate sectors, which are faring better. For example, the value of office construction is expected to decline to only $82.2 billion this year compared with $138.3 billion in 2019, according to Dodge Construction Network, a data and analytics firm.

But employment in the sector this year was more than 7.9 million in May, up from 7.5 million in 2019. The rise was partly because of companies that shifted to more active sectors such as warehouses and healthcare facilities, according to Dodge.

“While the office sector may be down, there’s a lot of growth elsewhere that’s offsetting it,” said Richard Branch, Dodge’s chief economist.

Still, these cutbacks in the businesses that support office buildings are magnifying the broad economic repercussions resulting from remote work and hybrid workplace strategies. The brunt of the impact so far has been mostly felt by office landlords and their lenders as well as small businesses that depend on commuters.

But increasingly the sting from changing work patterns is being felt by other professions that benefit from a healthy office market. “This illustrates the multiplier effect of any…declining industry,” said Brian Lewandowski,

Many of the businesses being hurt are small ones. About 30% of architecture firms are sole practitioners and 60% have fewer than five employees, according to Kermit Baker, chief economist of the American Institute of Architects.

SanMar Building Services, a Manhattan cleaning company with 20 employees, used to have nightly work at 30 office buildings. That has dwindled to about 15, forcing the company to focus more on restaurants, gyms and daycare centers. “Because business was down, we had to do something,” said owner Steve Slutsky.

Among the hardest hit in the office ecosystem are the thousands of lawyers, financiers and brokers who depend on the office leasing and sales markets. Both leasing and sales have experienced steep declines.

Investors purchased only $17.6 billion of U.S. office buildings in the first five months of 2023, a 65% decline from the same period in 2022, according to data firm MSCI Real Assets. New searches in the office-leasing market in May were down 37% from what they were in 2018 and 2019, according to data firm VTS.

With revenue from brokerage commissions falling, CBRE Group, the world’s largest real- estate services firm, last year announced a $400 million cost-reduction plan that included layoffs. Eastdil Secured, a real-estate investment bank, earlier this year laid off 7% of its global staff in response to the decline in all commercial real-estate sales, including office.

Even when brokers do leasing deals, commissions often add up to less than normal because leases are for fewer years. Before the pandemic, average lease terms were 10 years and commissions came to 32% to 36% of the first year’s rent, said Jim Wacht,

Now, many tenants are signing leases of only three years as they try to figure out their new workplace strategies. Commissions on those deals are about 12% of the first year’s rent, Wacht said.

Leasing brokers also have to navigate a market in which many landlords are facing financial distress. “Despite the fact that you might have a commission agreement, collecting it can be difficult,” Wacht said.

Participants in the office industry say the pain from the weak market so far isn’t as bad as it was during previous downturns. Architectural billings have been declining since the fall at firms in the West and Northeast, according to a May report by the American Institute of Architects. But billings fell for four straight years during the global financial crisis, said Baker.

If the deal drought continues much longer in the office brokerage business, many marginal brokers will have to find new jobs because they earn all their money from commissions. “If someone isn’t making any money, they’re going to go somewhere else,” said George Fox, an executive vice president at CBRE.

Write to Peter Grant at [email protected]