Small biz owners scale back their office space or go remote altogether. Some move to the suburbs

 (AP) — After 46 years, Steve Replin has decided to give up his office space.

Replin, who has a law practice and acts as an alternative lender in Denver, is adapting to the changing preferences of clients, who would rather conduct business online, or in a less professional setting like a coffee shop.

“I am 76 and have grown up being in actual physical spaces as offices, but I really think that the ‘kids’ have it right,” by shunning offices, he said.

The pandemic has had a transformative effect on the office space landscape. Many businesses are shifting away from traditional spaces toward hybrid work and more flexible, collaborative spaces. About 23% of U.S. office space is available, compared with 16% before the pandemic, according to global real estate advisor Avison Young.

While the real estate decisions of big companies get much of the attention, small business owners are also reassessing what they need in terms of an office. Some are finding more bang for their buck in suburban locations. Others are scaling back on square footage, and still others, like Replin, are contemplating a move to going permanently remote. Experts say the time is ripe to reassess what a small business actually needs.

“(Lower demand for commercial real estate) opens up an opportunity where I may be able to consider some change in my space because it’s either newer, it’s in a little bit better location,” said Alan Pontius, national director of the office and industrial division at commercial real estate brokerage firm Marcus & Millichap. “And maybe I can get that at the same or even a better rate than I have been paying just because of what’s happened with the movement of rental rates. So it does open up some opportunity to consider new options.”

That’s true for Hunter Garnett. When he started his law firm during the pandemic in December 2021, he signed a lease for 2,000 square feet of office space in downtown Huntsville, Alabama, because he thought it was important to set up shop close to the courthouse.

Garnett quickly realized that court appearances via Zoom were here to stay. He goes to court once every other week now, compared to two or three times a week before the pandemic when he worked at another law firm.

“I thought I’d be in the courthouse a lot and that I would grow fast and need more space,” he said. “And then I did grow fast, but I figured out pretty quickly that it was more economical to hire remote workers, so our need for physical space didn’t grow as fast as I expected.”

Garnett is looking for a smaller space – 1,200 square feet or so -- in suburban Huntsville, closer to where most of his clients live. He expects to pay $1.50 a foot for rent, including parking, $1 less than what he pays now.

Leslie Saul also cherished her 31-year-old architecture and interior design firm’s central location in Cambridge, Mass., which she’d had since 2000. But when her landlord doubled her $3,000 a month rent, she considered other options, including a suburban town. The pandemic taught her she could work in a smaller space, but she still saw value in having office space with a physical library.

“We wanted to have an identity,” she said. “We wanted to be visible.”

So, on Jan. 1 she opened her new office in Winchester Center, a smaller town outside of Cambridge. The rent is cheaper because the new space is smaller and it includes parking. Saul said she was able to downsize her library, filled with samples and a necessary part of the firm’s office space.

“I think that this time around, I was definitely open to many options that I might never have been even considering before the pandemic,” she said.

For businesses that no longer have workers coming into the office full-time and have hired some remote staffers -- two trends spurred by the pandemic -- a co-working space can fit the bill.

Annie Scranton, who owns Pace Public Relations in Manhattan, is considering a co-working space that holds eight people. None of her staff of 20 comes into the current office full-time anymore – some live and work outside New York – but she wants a space that could entice a few workers to come in, at least on some days.

“Mostly staff is coming in when there are in-person client meetings when there are events that they’re attending, you know, that then it’s easy to work from the office or when there are in-person planned, like brainstorming creativity sessions,” she said.

Some business owners are even deciding to give up office space altogether. Replin said he’s meeting clients in coffee shops or by video chat. He finds organizing these meetings is quicker and easier than in-office visits.

“I can get a meeting put together in an afternoon, whereas sometimes it took a week or two to find a day when they could allocate a 45-minute drive to my office, an hour appointment, and then a 45-minute drive back to wherever they came from,” he said. “So, it’s just it’s amazing. It’s night and day.”

Replin plans to let his lease expire when it comes up in three months. And it’s not just him: He’s noticed vacancies on every floor in his 11-story office building.

Muffetta Krueger’s cleaning and household staffing businesses boomed during the pandemic, and she realized she could grow in some areas without adding more office space. She has two physical offices in Larchmont, N.Y., and Greenwood Lake, N.J.

She planned to look for office space to expand in Maryland, near the D.C. metropolitan area but decided she could manage operations there remotely — at least at first. Now, they send candidates applications online and conduct video interviews rather than having them come into an office.

“If we’re able to operate and keep our costs low, there is no reason to burden ourselves with real estate,” Krueger said.

Chair Jerome Powell will enter this week’s Federal Reserve meeting in a much more desirable position than he likely ever expected: Inflation is getting close to the Fed’s target rate, the economy is still growing at a healthy paceconsumers keep spending and the unemployment rate is near a half-century low.

A year ago, most economists had envisioned a much darker outlook. As the Fed raised interest rates at the fastest pace in four decades to fight high inflation, most economists warned of a recession, possibly a painful one, with waves of layoffs and rising unemployment. Even the Fed’s own economists had projected that the economy would sink into a recession in 2023.

The unexpectedly rosy picture — one that’s sure to be subject to heated debate in the 2024 presidential race — may have left some Fed officials saddled by uncertainty. With their frameworks for assessing the economy upended by the pandemic and its aftermath, it’s hard to know whether the economy’s healthy conditions can endure.

“It almost feels like what we saw in the second half of last year was too good to be true,” said Nathan Sheets, chief global economist at Citi and a former Fed economist. “When things are too good to be true, you want to try to scratch the surface and say, how durable is this?”

Some Fed officials have raised similar questions and expressed caution about their next moves. When they last met in December, the Fed’s 19 policymakers who participate in interest-rate decisions said they expected to cut their benchmark rate three times this year. Yet the timing of those rate cuts, which would lead to lower borrowing costs for consumers and businesses, remains uncertain.

Most economists say they expect the first rate cut to occur in May or June, though a cut at the Fed’s March meeting is not off the table. The timing of rate cuts will almost certainly be the top issue at the Fed’s two-day meeting, which ends Wednesday. The Fed is all but sure to announce after the meeting that it’s leaving its key rate unchanged at about 5.4%, where it’s stood since July, its highest point in 22 years.

The central bank’s consideration of rate cuts will take place against an intensifying presidential campaign as President Joe Biden seeks re-election with the economy a polarizing issue. Rate cuts have the potential to provoke an attack from former President Donald Trump, who nominated Powell to be Fed chair but later publicly criticized him for raising rates during the Trump presidency and demanded that he lower them.

At a news conference last month, Powell said: “We don’t think about politics. We think about what’s the right thing to do for the economy.”

On Wednesday, the Fed’s policymakers could signal that they’re close to cutting rates by adjusting the language in the statement they issue after each meeting. In December, the statement still suggested that the officials were willing to consider more rate increases. Removing or altering that language in next week’s statement would signal that they’re shifting to a new approach, focused on rate cuts.

The Fed’s aggressive streak of 11 rate hikes, beginning in March 2022, was intended to tame inflation, which peaked in June 2022 — according to the central bank’s preferred gauge — at 7.1%. But data released Friday showed that over the past six months, inflation has fallen all the way back to the Fed’s 2% annual target level. In the past three months, year-over-over inflation that excludes volatile food and energy costs has dropped to just 1.5%.

Yet Fed officials are expected to wait for at least a few months, to try to build confidence that inflation has been truly beaten, before they start reducing rates.

Christopher Waller, an influential member of the Fed’s governing board, sounded a note of caution in a recent speech.

“Inflation of 2% is our goal,” he said. “But that goal cannot be achieved for just a moment in time. It must be sustained.”

Waller has previously referred to having been “head-faked” on inflation. On more than one occasion, when initial government reports had indicated that inflation was falling, subsequent revisions to the data showed that price increases actually remained high. In his speech, Waller mentioned the government’s upcoming revisions of inflation data, to be released on Feb. 9, as a report he will be watching closely.

It’s possible that inflation could stay undesirably high, especially if the economy remains strong, which could cause the Fed to leave rates unchanged. Fed officials have said that as long as the economy stays healthy, they can take time before cutting rates.

Average paychecks are still increasing at about 4% to 4.5% annually, and apartment rental prices are still rising faster than they did before the pandemic. Officials expect rent prices to cool as a slew of new apartment buildings are completed. But that has yet to show up in the official data. And some prices in the service sector, such as for restaurant meals, are still accelerating.

“We would argue we’re not out of the woods yet,” said Tiffany Wilding, a managing director and economist at PIMCO. “The Fed does not want to be Arthur Burns,” she added, referring to the Fed chair from the 1970s who is widely blamed for cutting rates too soon and allowing inflation to become more deeply entrenched in the economy.

At the same time, the Fed is grappling with an equivalent risk in the other direction: That it might keep its key rate too high for too long and potentially trigger a recession. Consumers spent at a healthy pace in the final three months of last year, but they could eventually pull back in the face of higher borrowing costs and prices that are still well above where they were three years ago.

“They run the risk of overstating their welcome at high rates and slowing the economy down in a way that really isn’t necessary,” said Bill English, a finance professor at the Yale School of Management and a former Fed economist.

Still, the Fed could also accelerate its rate cuts later this year if the economy does weaken, just as it rapidly raised rates after waiting too long to start boosting them in 2022, said Claudia Sahm, founder of Sahm Consulting and a former Fed economist,

“I fully expect them to wait as long as humanly possible to cut rates,” she said. “The Fed excels at being behind the curve.”

The Biden administration will start implementing a new requirement for the developers of major artificial intelligence systems to disclose their safety test results to the government.

The White House AI Council is scheduled to meet Monday to review progress made on the executive order that President Joe Biden signed three months ago to manage the fast-evolving technology.

Chief among the 90-day goals from the order was a mandate under the Defense Production Act that AI companies share vital information with the Commerce Department, including safety tests.

Ben Buchanan, the White House special adviser on AI, said in an interview that the government wants “to know AI systems are safe before they’re released to the public — the president has been very clear that companies need to meet that bar.”

The software companies are committed to a set of categories for the safety tests, but companies do not yet have to comply with a common standard on the tests. The government’s National Institute of Standards and Technology will develop a uniform framework for assessing safety, as part of the order Biden signed in October.

AI has emerged as a leading economic and national security consideration for the federal government, given the investments and uncertainties caused by the launch of new AI tools such as ChatGPT that can generate text, images, and sounds. The Biden administration also is looking at congressional legislation and working with other countries and the European Union on rules for managing the technology.

The Commerce Department has developed a draft rule on U.S. cloud companies that provide servers to foreign AI developers.

Nine federal agencies, including the Departments of Defense, Transportation, Treasury, and Health and Human Services, have completed risk assessments regarding AI’s use in critical national infrastructure such as the electric grid.

The government also has scaled up the hiring of AI experts and data scientists at federal agencies.

“We know that AI has transformative effects and potential,” Buchanan said. “We’re not trying to upend the apple cart there, but we are trying to make sure the regulators are prepared to manage this technology.”

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