Job cuts throughout the tech industry are adding another layer of uncertainty for a U.S. office market already contending with record-high vacancies.
Since the start of the year, a roster of companies such as Microsoft, eBay, Google, Instagram, Salesforce and Amazon have collectively passed out more than 24,000 pink slips in a bid to manage expenses and reallocate capital expenditure budgets.
It comes as some tech firms say they are shifting their investment priorities to focus on artificial intelligence and changing the calculus on how they value office space, according to industry analysts. What's more, the national office market is already contending with an unprecedented glut of empty and unwanted space, a challenging environment that has pushed the vacancy rate to a record high.
The complete effect of the cuts — totaling nearly 440,000 positions since 2022 — on demand for office space has yet to be determined as the market responds to other pandemic-related shifts, such as the rise of remote and hybrid work. Even so, despite not yet being fully realized, the connection between workforce reductions and commercial real estate is becoming increasingly apparent.
"The link is there" between job cuts and vacant space, Colin Yasukochi, executive director of CBRE's Tech Insights Center in San Francisco, told CoStar News. "It is not as pronounced or direct as you would think, and of course hybrid and remote work has had a much larger impact on office needs than layoffs have so far. But the fact is that we've seen a lot of sublease space come from tech companies that have reduced their office footprints, mostly in relation to hybrid and remote work, but partially related to layoffs as well."
Tech led all sectors in the number of announced job cuts last year, according to recent tracking data from outplacement firm Challenger, Gray & Christmas. Tech layoffs more than doubled the previous-year figure for the first 11 months of 2023 as firms cut an unprecedented number of jobs, according to the company.
Tech companies are also responsible for as much as 25% of the nation's total amount of office sublease availability, Yasukochi said, a substantial portion largely a result of firms that had excess space in their real estate portfolios prior to the pandemic and were betting on an economic landscape that didn't quite materialize.
"Many expected there would be a norm of being in the office on a regular basis when they leased the space," he said. "That didn't happen, so they've never filled a lot of that office space. The changed dynamic is that, for every new job created in the future, there will be less office space needed for that role than in the past."
That new thinking has upended the standard equation for which office tenants have long calculated how much space they needed based on headcount. Some companies are now getting rid of space and shrinking their previously large real estate portfolios in pursuit of efficient growth, a move that stands in stark contrast to the expand-at-all-costs mentality that dictated some of the industry's largest office deals in the decade before the coronavirus outbreak.
To be clear, there's no guarantee the job cuts will continue, with some forecasts predicting hiring to pick up in the coming months.
'Strained' Relationship
By the end of 2020, the tech industry accounted for about one-fifth of the country's total office leasing activity, according to data from CBRE, as some of the largest companies — including Facebook parent Meta, Apple, Microsoft and the investment platform Robinhood — invested in the idea that offices would play a critical role in the future of work.
Tech companies were some of the country's greatest sources of leasing and acquisition activity prior to the pandemic, scooping up hundreds of thousands of square feet to accommodate yearslong headcount growth among workforces that largely commuted to an office every workday. These global tech firms accounted for more than a third of the nation’s largest 15 office leases in 2019, according to CoStar data. Deals made by Google, Amazon, Apple, Meta and others collectively totaled more than 5 million square feet.
When 2022 arrived, however, tech companies' pandemic-fueled growth streaks slowed. Pressure from rising interest rates, declining advertising revenue and an uncertain economic outlook pushed many of them to freeze hiring, eliminate extraneous positions and prioritize profitability over riskier investments. Combined, those factors have slowed already sluggish leasing demand.
"Historically, the main driver for office demand has been employment growth," said Phil Mobley, CoStar's national director of office analytics. "What's happened since the pandemic is that relationship has been altered and strained."
So far, and this is something Mobley said is still being worked out, that relationship has managed to hold on the market's downside. In other words, in early 2020 roughly 2.5 million office workers lost their jobs within two months, triggering an extended run of increased vacancy and tenants giving space back.
"As far as that went, the relationship held," Mobley said. "But on the upside, we still haven’t found where that relationship will take root again."
Throughout 2021 and 2022, the nation's economy logged annual employment growth exceeding 5%, especially for office-using jobs that had traditionally required a certain amount of physical workspace. That two-year window of employment growth may have been more than double what was reported in the decade leading up to the pandemic, but Mobley said there was only a "very, very brief period" when office tenants signed on for more space than they were willing to let go.
"There's this interesting, uneasy equilibrium going on right now where layoffs, quits and hiring are all pretty low, particularly for office-using sectors, and so a lot of the cost cutting has shifted toward real estate" with tech giants trimming property costs, Mobley said. "As that changes, and if that changes and the layoff news becomes more than just a couple of headlines, I don't expect that to help office demand."
Correlation, Not Quite Causation
The links between layoffs and real estate decisions have yet to be formally established. Regardless, corporate moves to slow hiring or eliminate dozens, hundreds or sometimes thousands of positions, are expected to play a critical role in the national office market's slow slog to recovery.
What's more, the move by some tenants to get rid of extraneous real estate expenses in an attempt to avoid layoffs further complicates any effort to gauge the direct impact of recent layoffs on the future office market, Mobley said.
Take Amazon, for example. The Seattle-based behemoth has cut more than 25,000 employees over the past couple of years, most recently eliminating 500 roles at the start of 2024 across its streaming, theatrical film and Twitch operations. While the layoffs have coincided with an ongoing reduction of its global office footprint — it shed hundreds of thousands of square feet of office space last year and has halted construction on a number of high-profile office developments — the company maintains its layoff decisions have had no impact on its real estate-related ones.
"The changes to our physical footprint are not a result of nor indicative of role eliminations," an Amazon spokesperson told CoStar News.
Instead, the paused construction work and retooling of its physical workplace footprint is a chance for the company to evaluate how it needs to efficiently use the space it has and ensure its new projects are built "as right or as close to right as possible."
Job cuts could ultimately be a brief chapter in the office market's post-pandemic evolution, however, with some forecasts expecting hiring growth will return in the second half of this year. There are already some signs of that emerging, Yasukochi said, especially among companies racing to capitalize on the anticipated AI boom.
"It could create another growth wave in the future," the CBRE executive said of AI's potential to fuel demand for physical office space. "It may not manifest itself right away, but lot of tech employers have cut excess expenses and have prioritized projects to refocus on growth sectors, AI being one of them."
Whether it is enough to make up for years of losses and tenant downsizings remains to be seen, however.
"There is still excess capacity in the system as it relates to office portfolios," Yasukochi said. "Jobs may grow in the second half of the year, but that doesn’t mean office demand will grow right away."