The AI Disruption: How AI Will Affect the Demand for Office Space

In this article, we explore:

• AI's potential to replace office workers and reduce demand for office space
• The impact of AI on commercial real estate and office portfolio reductions
• Challenges AI poses to landlords and office property values
• How AI can optimize office space efficiency
• Opportunities for tenants to negotiate better lease deals

The full implications of artificial intelligence have yet to be unleashed. With the potential to replace a slew of white-collar work, professionals are understandably eagerly awaiting how this will play out.

Because even in its earliest form, AI stands to be one of the most substantial disrupters to the labor market since the Industrial Revolution. And its ability to leverage technology will make the effects that the pandemic had on work and the office market seem weak by comparison.

So, let’s dive into the evolution of AI in the corporate environment and its potential catastrophic ramifications on the demand for certain skillsets and office space in general.

Will AI Replace Office Workers?

Chief Executive Officer Arvind Krishna of IBM predicted that roughly one third of their in-office employees could be easily replaced by artificial intelligence. Out of their 26,000 non-customer facing roles, this means 7,800 jobs lost.

Harsh, no? It gets worse. IBM (and others) already slowed their hiring to monitor AI’s evolving capabilities. The hope is that it will soon become advanced enough to potentially replace the responsibilities of salaried employees. They’ve put a complete pause on bringing more professionals like human resources on board while continuing to hire for software development and customer-facing roles.

And no matter what you think about the robot-white-collar revolution, this is a powerful, albeit drastic step to unlocking massive savings and promoting the efficiency of individual employees.

It may be the be the future of maintaining profitability in a recession, and/or competitiveness against corporate rivals. Because with this and other measures, IBM is thriving while other businesses may crash and burn. 

Artificial intelligence is still being gradually phased into the corporate consciousness, but it’s multi-billion-dollar potential is hard to ignore. It’s also becoming more common for financial services companies like Morgan Stanley which has been offering clients AI-based investment advice.

And as they invest more in expansion, the potential implications are endless. More and more businesses will seek to take advantage of its capabilities, potentially creating the onset of an upheaval of the global workforce.

“Goldman Sachs economists predicted in a report that 18% of global work, some 300 million jobs, could be eliminated by AI-powered automation.”

Now ignoring the potential catastrophe this poses to the working world for a moment; on another note- How do we think this will affect the demand for office space?

Office Portfolio Cuts Were Already Being Planned

Artificial intelligence empowers companies to do more with less white-collar labor. And if the estimates are correct that AI can reduce a workforce by a third, that leaves a lot of extra office space.

Even before widespread AI implementation, major cuts in the number and size of CRE properties (especially offices) were being taken or plotted. Because we’ve already seen the affect that technology can have in shaping the workforce. An interplay of hybrid and at-home schedules have left offices in varying degrees of emptiness. Advanced communication platforms and virtual collaboration tools have enabled remote work to become more seamless and productive.

Teams can collaborate effectively without being physically present in the same office space, which has never been done before. And this in turn has set the demand for office space in a tailspin.

In the coming years, an overwhelming number of businesses are planning to slash their footprints. From the 350 globally leading businesses surveyed (over 50,000 employees), half reported that they were planning portfolio-wide reductions to the size or number of their properties, according to Bloomberg.

So, the global trend towards right-sizing will doubtlessly amplified by the advent of artificial intelligence. This will have a profound impact on the demand for office space for the conceivable future.

Because as the role of the office continues to evolve, many businesses were already taking a cautious approach to their portfolio, attempting to both maximize the efficiency of their footprint while prioritizing long-term savings. And with giants like IBM now taking that same pause with their workforce until the full strength of AI is harnessed, others will take tangible steps to increase the role it plays.

Robots Vs. Landlords? 

AI has the potential to deliver a decisive blow to commercial landlords already grappling with the burden of high interest rates and dwindling demand. With AI's ability to automate routine tasks, improve efficiency, and enable remote work, businesses may find themselves needing even less physical office space. As a result, the demand for commercial real estate could decline further, leading to higher vacancy rates and a subsequent devaluation of office properties across the board.

As the technological advancements of AI continue to reshape industries, commercial landlords now face the added pressure of adapting to an evolving landscape that further challenge their viability in the market. Adapting to the AI-driven future will require landlords to embrace technology, leverage data analytics to understand market trends, and investing in properties that align with the changing demands of tenants.

AI's Potential to Maximize Office Efficiency

But at the same time, AI stands to revolutionize office space and the way corporations think about their portfolios.

From implementing advanced utilization tracking to weighing occupancy metrics, artificial intelligence stands to make portfolio optimization simpler than ever.

With advanced tracking methods like card swipes and app trackers, businesses can gain deeper insights into their utilization patterns, leading to more informed decision-making. This level of understanding allows tenants to optimize their office space footprint, making the most efficient use of their resources and maximizing productivity. By leveraging AI technology, businesses can unlock new possibilities for managing their office spaces and enhancing overall efficiency.

Because AI enables companies to gather and analyze vast amounts of data related to employee preferences, productivity, and work patterns. This data can inform decision-making processes regarding office space requirements, such as determining the optimal location, size, and amenities. AI algorithms can identify trends and patterns that humans may overlook, helping businesses make more informed choices when it comes to office space investments.

For example, AI-powered systems can adjust lighting, temperature, and noise levels based on employee preferences, creating a more comfortable and productive working environment. This focus on employee well-being and satisfaction can attract and retain top talent, even in a more flexible work landscape.

AI technologies can improve the overall workplace experience by personalizing and tailoring office environments to individual employee needs and this will undoubtedly shape the demand for office space in this new environment. This will likely further drive the demand or premium, AI empowered properties.

Tenants Can Take Advantage of AI

AI's relentless automation, unwavering efficiency, and remote work capabilities threaten the very existence of physical office spaces.

In the coming years, hundreds of millions of square feet of office space will hit the market, so for the prepared tenant the perfect storm is brewing for the lease deal of a lifetime. If competition and cost were ever barriers-to-entry, there’s nothing stopping you now.

With record vacancies, commercial property owners have no choice but to be flexible with their tenants. So, if you plan to retain a physical office presence and are willing to sign on for a longer term, you may be able to renegotiate your space requirements and downsize to your current needs. Or start from scratch and source the market for the properties and locations that will best fit your new streamlined utilization metrics.

The point is that there are new standards of efficiency when it comes to portfolio optimization and now is the time to take advantage. Stay on top of the latest evolving trends in commercial real estate by subscribing to our blog.