RTO is here to stay

1. Reimagined mixed use and a retail revival. Among the many things the pandemic has forced the real estate industry to reconcile with has been the importance of mixed use. Without the requirement for workers to be in the office every day and with people’s sphere of movement shrinking during the pandemic, single-use monoliths – like suburban office parks, financial districts, and malls – were decimated. Although mixed use is far from a new concept, the pandemic and RTO have placed new emphasis on the resilience and success of mixed use. Retail, in particular, has seen encouraging signs of revival, especially in large metropolitan regions across the U.S. In New York City, for example, 2024 was the strongest year for retail in nearly a decade, with the amount of available space falling to nearly 15%.
2. A second wind for transit-oriented, sustainable development. With RTO ramping up, mass transit usage is recovering (and, in some cases, exceeding) to pre-pandemic levels across the U.S. As growing numbers of commuters take mass transit to their workplaces, the demand for sustainable residential, commercial, and retail development near to transit routes and stations is expected to grow considerably.
3. A slowdown in commercial-to-residential conversions. At the outset of the pandemic, many policymakers and talking heads saw the challenges facing commercial real estate as a significant opportunity to build out much needed housing. The theory went that now-vacant office spaces, many in high-demand metropolitan areas, could be converted into apartments and condos, helping to chip away at the housing shortage. Although well-intentioned, this theory has proven to be very difficult to execute due to poor economics, zoning restrictions, and physical differences in building stock. With millions of workers also returning to their offices, the pressure to convert unused office space also dissipates significantly, implying that fewer and fewer real estate companies will be pursuing these kinds of conversions.
4. Gravity kicks in for property valuations in small and ex-urban locales. Perhaps one of the more interesting phenomena of the pandemic was the dizzying rise of property values in small cities and exurban areas across the U.S. Places like Pine Hills, FL, a bedroom community of Orlando, saw nearly a tripling in property values in the ten years before 2024, as people were free to work remotely from wherever they wished to live. With RTO and people wishing to live closer to where they work, it’s safe to say that the demand-supply imbalance in these areas will likely be reconciled.

What can real estate companies do to stay ahead of RTO?

• Anticipate shifting demand. Although the impacts of RTO are still playing out, proactive companies will anticipate how they can stay ahead of shifting demand (e.g., rebounding office sector, more mixed use, greater interest in transit-oriented development) and better serve their tenants’ and customers’ needs. This can mean many things depending on each company’s business model, from retooling acquisition & divestment strategies to retrofitting properties to better serve new demands.
• Remain agile in responding to the new normal. With shifting demand comes shifting usage of properties, and the old, pre-pandemic normal is very unlikely to look the same as the new one. With the prominence of the hybrid work schedule, employees are unlikely to be spending five days a week in office and the ramp up will take time. Real estate companies would do well to recognize that, finding new ways of adjusting their operations and offerings accordingly (e.g., flexible overflow space, building energy management systems which adjust based on use).
• Strengthen resilience. The pandemic laid bare how quickly even well-established business models of a given asset class can be turned on their head. The key to avoiding similar fates in the future is embracing resilient, diversified approaches to development. Mixed use – having proved itself quite resilient during the pandemic – may prove an equally strong play in an RTO future.

A few considerations for management teams:

1. How is your company strategically repositioning its portfolio to capitalize on the resurgence of commercial space while mitigating risks in other asset classes?
2. What proactive measures are companies taking to anticipate and respond to shifting demand, including the growing preference for mixed-use and transit-oriented development?
3. How can companies enhance operational agility to adapt to hybrid work models and fluctuating space utilization patterns?
4. Are current investment and development strategies resilient enough to navigate potential downturns in exurban property valuations and a slowdown in commercial-to-residential conversions?
5. Is your company bold enough to rethink the traditional office model, or is it merely reacting to short-term trends? How can you innovate to lead in this evolving landscape?