Part one of this series began with a discussion on inflation and interest rates, and how we anticipate these factors will influence leasing and development in our market. As we continue the new year with the expectation of slowing economic growth and continued high inflation, we want to take a closer look at how the current economy will influence our working habits — and how commercial property trends will change as a result.

Inflation and Spending

As we know from our own personal finances, people tend to change their spending habits when inflation drives prices higher. We may buy fewer name-brand products, eat out less frequently, and cut back on luxuries like vacations. To manage our expenses long-term, homeowners may even choose to downsize to a smaller house.

Businesses are no different. Inflation forces businesses to also make more prudent buying decisions, spend less opulently and manage costs aggressively.

For businesses, however, there is an additional complicating factor. Inflation and the resulting increase in the cost of living often necessitates higher pay for workers. As companies attempt to manage costs, this presents a significant challenge in any inflationary year.  Further confounding the matter in 2022 is the nation’s tight labor market, in which competitive pay will be vital to attracting new employees and retaining existing ones.

How Workplaces Will Navigate Inflation

With pay cuts presumably off the table, how will employers contain costs while remaining competitive in the marketplace? One of the most obvious cost-cutting measures is to reduce operating costs like rent and utilities. This can be done in one of two ways: either by moving to a less costly facility or reducing the amount of space they own or lease.

Business owners leasing high-rent modern office spaces may need to evaluate whether a “Class A image” is vital to their operations. An office in a Class A building gives clients a lasting impression and provides top-notch amenities to employees. However, the operating costs can be prohibitive for businesses that don’t rely on prestige as a differentiator. Businesses will need to determine the importance of their image when evaluating costs.

The second potential method of reducing rent and utilities is to transition to a remote or hybrid workforce — a work structure many of us are already familiar with. Gallup notes that as recently as September 2021, 45% of full-time employees in the U.S. were working at least partly remotely, and more than two thirds of white-collar workers were working from home at least part-time.

Remote and hybrid work can save companies an average of $11,000 per employee over the course of a year, according to Global Workplace Analytics, and the majority of this savings is related to real estate. While it’s unlikely that most employers will switch to a fully remote workforce, the need for cost management will compel many businesses to switch to a hybrid model to reduce operating costs until the inflation rate stabilizes.

Share in the comments how you and your business are planning to manage through inflation.

This is part two of a two-part series on the impact of inflation on commercial real estate. Read part one here.

Content and strategies shared on NAIOP blog posts are intended to provide information and insights to industry practitioners and do not constitute advice or recommendations. NAIOP and its presenters disclaim any liability for actions taken as a result of these blog posts.