The U.S. office market, recovering slowly from the COVID-19 pandemic that has kept many buildings mostly empty, faces a new workplace trend that could shake up tenant demand.

Enter the metaverse, which looks nothing like the glass, drywall and carpets where desks exist in the brick-and-mortar world.

Some early adopters are moving to a virtual landscape where 3D manifestations of employees are created to move around, interact with one another and collaborate on projects in wildly imagined buildings and locations. It’s an environment familiar to a generation of video game players, but the graphics can be crude, often cartoonish.

That’s not stopping companies from setting up virtual headquarters in the metaverse, and though there are doubters, a debate is heating up over whether the nascent activity can snowball into a killer of traditional space.

Baltimore-based software firm Mindgrub Technologies is already transitioning its 200 employees to operate exclusively out of the metaverse and leaving much of its physical space behind. Accounting and consulting firm Prager Metis, virtual real estate investor Everyrealm and financial services firm AMTD International also have an office presence in the metaverse.

They join major brands such as McDonald’s, Samsung, Walmart and L’Oréal that have set up offices and stores in virtual worlds. Meta, social media giant Facebook’s parent company, has pivoted toward developing the metaverse in a move to realize CEO Mark Zuckerberg’s vision.

The metaverse is more than just the handful of digital worlds that have been created and where many more are in development. A number of large platforms are being formed to allow people to work, shop and play anytime from anywhere in virtual space.

“We are increasingly seeing companies migrate to the metaverse to diversify their physical presence. Post-COVID, corporations are beginning to realize that having a virtual identity can be complimentary to their strategy,” Mario Stefanidis, vice president of research at Roundhill Investments, told CoStar News in an email.

Roundhill is a registered investment adviser and sponsor of the first metaverse exchange-traded fund, Roundhill Ball Metaverse ETF. The investment vehicle is designed to offer investors exposure to the metaverse, which Roundhill defines as “a successor to the current internet that will be interoperable, persistent, synchronous, open to unlimited participants with a fully functioning economy, and an experience that spans the virtual and ‘real’ world.”

That day is not right around the corner. The technology has not caught up to what it can become. Many firms are still letting the market develop organically while they watch, learn and prepare to enter. However, wide adoption of the metaverse is coming and being propelled by major companies, Stefanidis said.

“Tech giants like Microsoft and Meta are creating tools to enable collaboration in alternate reality and virtual reality,” Stefanidis said. “As these collaborative tools continue to roll out, we expect to see more corporations prepare themselves for a presence in the metaverse.”

It’s been a costly period of preparation for Meta, which changed its name from Facebook last year. The company lost almost a quarter of its market capitalization when it reported weak but profitable results for 2021 and strong headwinds for revenue growth. Its virtual reality division posted a net loss of more than $10 billion. The company plans to spend up to $95 billion this year to build out its technology, with the largest share of that going to personnel, data centers, servers, network infrastructure and facilities to support its evolution into the metaverse.

Setting up a metaverse headquarters now may be ahead of the times, even discouraged and viewed as a publicity stunt. But it is a public relations move with a purpose, Todd Marks, president and CEO of Mindgrub, told CoStar News in an interview. To hire tech talent in today’s market, a company has to be in the metaverse.

“The trend used to be that when companies hired, they generally hired in geographies where they had physical offices, and I think that trend is going away. The world is already flatter than it used to be,” Marks said. “They are going to hire wherever they can get the talent these days, and therefore their office space is going to have to be dynamic based on where they’re starting to get a saturation of certain talent.”

In real-world Baltimore, Mindgrub occupies about 20,000 square feet at McHenry Row II in the Locust Point neighborhood, a former industrial area that has attracted developers. As it moves to the metaverse, the firm’s need for physical space could shrink to as little as 1,000 square feet, Marks told CoStar News. The CEO currently has about 15,000 square feet up for sublet, some as flexible workspace through a concept he’s dubbed Mindhub.

That cost savings is an attractive option for tenants, and virtual real estate could have profound consequences for real-world property, according to Hannah Jeong, head of valuation and advisory services for Colliers International in Hong Kong. Jeong expressed her thoughts in a recent report.

Over the past few months, Jeong said, she has seen the volume of transactions for commercial real estate in extended reality, which she refers to as "XR," ramp up. She projected these digital landscapes will grow into a fully functioning economy in a few short years.

“These new worlds will have tangible benefits for businesses, retailers, developers and investors,” Jeong wrote. “XR will allow companies to further decentralize their office space in the commercial sector. Already hastened by the pandemic, taking staff away from physical offices has been a way to optimize operational costs, prevent physical interaction and any resultant virus spread, and save staff the expense, risk and grind of daily commuting, especially in sprawling cities.”

For New York-based Prager Metis, a metaverse headquarters is all about attracting clients from the growing technology field.

“The opening of a metaverse office reflects Prager Metis’ belief that the metaverse will be the future and technology will continue to influence the way the world operates,” CEO Glenn Friedman said in a statement. “Our new metaverse headquarters will serve as a bridge between traditional and digital and offer valuable real world financial services to the metaverse. Our presence in the metaverse shows how serious we are about our vision for the future and supports our belief that there is a tremendous need for financial expertise and resources in the evolving digital world.”

Going virtual is a global phenomenon with new examples weekly. Berlin-based Rent24, one of the largest flexible workspace providers in Europe, announced last week that "fundamental changes in the world of work” prompted it to open its first location in the metaverse.

Toronto-based Tokens.com, a publicly traded company that invests in cryptocurrency assets and businesses linked to the metaverse, opened Tokens.com Tower, a virtual office and event space in Crypto Valley, part of the 3D virtual world Decentraland, where users can buy and sell plots of digital real estate.

"The completion of Tokens.com Tower represents a step forward in being one of the only public companies with a permanent presence in the metaverse," Andrew Kiguel, CEO of Tokens.com, said in a statement. “We are also in the process of signing lease and rental agreements for digital advertising and event hosting in the tower. Our goal is to use the building to generate digital advertising, space rental, and event hosting revenue.”

A virtual headquarters is not for every company. New York-based Everyrealm, which invests in and develops real estate in multiple virtual worlds, tested out a digital office, and now CEO Janine Yorio tells clients not to bother.

“We built our own headquarters in the metaverse. A lot of companies come to us and say they want to do that. We did it as an experiment,” Yorio said on a recent Zoom call. “Honestly, nobody cares. I would advise you that if you’re thinking of doing this, save your breath, save your time. Nobody wants to go to your office in the real world and nobody wants to go to it in the metaverse either. If you can’t think of something that is going to make people stop playing on their phone or turn off Netflix or stop playing video games, don’t build it in the metaverse.”

Yet doing just that is on the mind of executives, Eddy Wagoner, chief investment officer of digital for real estate firm JLL in Chicago, told CoStar News in an email. Wagoner attended a conference in February with about 200 fellow CIOs at Fortune 200 companies.

“We’re just beginning the conversations around metaverse — and every one of them is interested in what we’re thinking about the impacts to the physical workplace as they rethink what they deliver coupled with their need to attract and retain talent on their own teams,” Wagoner said.

For Wagoner, the metaverse will not be a physical space killer, just as other technological advancements have not been. However, the development of cellphones, which freed workers from their desks, and the development of the internet, which separated workers from a confined office, inform his thinking on the metaverse.

The physical work world will have to evolve, he said.

“The introduction of the internet and mobile technologies didn’t eliminate their need for physical locations, it just evolved how I interact with them,” Wagoner said. “I believe the metaverse will have similar impacts to our physical spaces. I may be in an office and instead of the way we currently do video conference calls sitting around a table, the metaverse could enable a more immersive experience. That doesn’t ‘kill’ conference rooms in the workplace but requires them to evolve.

“The successful real estate people will be those who embrace that change is inevitable, leverage data science to understand how people are thinking about and wanting to use the new technologies in the workplace and move to evolve the physical workplace to take advantage of the digital innovations,” he said.