Opinion: Real Estate and Remote Work Can Coexist
Urban planners, commercial real estate investors, and techno-utopians alike watched for the “death of the traditional office” for years as knowledge work moved online. And, for years, “the office” as we’ve known it stubbornly remained a fixture of American life. In 2019, the percentage of American workers who spent the majority of their time working remotely was still quite low, at about 22%. As the pandemic played out, we all thought, just maybe, this time is different; that the office real estate sector will be fundamentally and permanently changed by a shift to work from home.
As of March 2021, the data is undeniable:
- 26% of workers were exclusively working from home as of December 2021.¹
- The national office vacancy rate was 15.7% in March 2022, roughly the same as March 2021, and up from 12.8% in February 2020.²
- Per McKinsey, 93% of organizations experienced an increase in employees working from home since the start of the pandemic, and only 23% of those organizations believed that the shift toward remote work wouldn’t be permanent.
The question is, how will the long-term work from home equilibrium look? Will knowledge workers gradually move back into office (with office absorption rates returning to pre-pandemic levels). Or will remote work continue to capture a greater share of corporate activity? However the dust settles, how will “work from home” affect real estate in the years to come?
This article looks at potential trajectories for remote work, and how we think the work-from-home paradigm may shape strategy for real estate investors.
Work From Home: Trending Upward?
In assessing how work from home will affect real estate, the big question is: will remote work trend upward or downward as the pandemic (hopefully) continues to fade into the background. As of March 2022, the CDC has softened public health messaging and many localities are removing mask mandates. Many employers are now welcoming employees back to the office, at least partially.
The pandemic prompted a forced experiment in remote work. Employees had a chance to see how much they liked remote work, and employers rapidly discovered the costs and benefits of a fully remote workforce. In aggregate, office workers discovered that work from home can be a pretty sweet deal: a survey by Owl Labs indicated that remote workers experienced less stress, better focus, and a better overall work-life balance. Full-time remote workers were 22% more likely than their in-office counterparts to report being “happy at work.”³ To boot, remote workers are estimated to save $2,500 to $4,000 per year on average in the form of lower food costs, lower commute costs, and fewer ancillary expenses like car repairs.⁴ The results have been pretty good for employers as well. Global Workplace Analytics estimates that employers can save $11,000 per employee per year in the form of lower office cost and lower turnover rates, and research found that remote workers are 43% more likely to work over 40 hours a week than full-time on-site employees.
So, knowledge work is trending inexorably toward 100%? Not necessarily. Despite the solid returns so far, most workers prefer something between a fully remote and fully on-site work regimen. A survey by Slack at the end of 2020 found that 72% of employees prefer a hybrid approach: some time in-office, some time remote.
We can’t say for sure what percentage of knowledge sector employees will be working remotely at the end of this decade. We can predict confidently, though, that it will be far greater than 0% and far less than 100% for three simple reasons:
- Employees like working remotely, the survey data bears it out.
- Even beyond the preferences of employees, some degree of remote workforce benefits employers.
- Humans are social creatures, and both employees and employers need some face time.
In other words, we can say confidently that the vast majority of knowledge sector employers will be planning for some form of hybrid home office / in-office protocol. Mark Zuckerberg, one of tech’s “Big Four” CEOs, predicts that 50% of Meta’s workforce will be fully remote by 2025. This is probably a more aggressive stance than most employers are willing to adopt at this point. However, it feels very likely that the aggregate percentage of hours spent working remotely will increase in the coming years versus pre-pandemic levels.
So, what does partial “work from home” look like for real estate markets?
Knowledge sector employers used to plan office leases with simple math: one desk, and a predictable number of square feet, per employee. The size of the space, and whether to sign a five- or ten-year lease, depended on hiring plans, with the expectation that new hires would be made within the geographic area and all employees would commute to the office and make use of their allotted space. The embrace of open office plans simplified life for both office operators and employers seeking to structure their workforce.
Even before the pandemic, this model was being challenged. Innovations in conference software, digital communication tools, and contractor networks had already spurred a shift away from the 100% in-office model. In the zeitgeist of office work immediately before the pandemic, no one liked open office plans and management theorists were rethinking how to foster productive interactions with office architecture. Corporate drama aside, WeWork showed the appeal of flexible, on-demand office space, with even giants like Amazon and Microsoft contracting to use WeWork space in lieu of satellite offices. All this to say that traditional floorplans and traditional leasing models were already under fire before the pandemic.
While no one has a crystal ball, here are a few possibilities for the future of office space and how work from home will affect real estate:
- Office operators will need to provide better, not more, space — the experience of the last few years has shown that the traditional office is not essential but can drive collaboration and culture for those employers who are intentional with their choices. Operators and employers must look to provide a better experience for a smaller share of total work hours. In short, the office buildings of the future will need to be purpose-built and designed for workers to collaborate most effectively.
- The “hotelization” of the office space —now more than ever, offices will need to be places employees want to go. This means better partitioning for health-conscious workers, more amenities, and generally a cozier, more aesthetically pleasing environment. Both operators and employers will have to think about this. Office developers and sponsors who win in the next decade may be those who make the process easy for tenants (employers).
- Flexible use and leasing models — following the pandemic, the high-density model of coworking spaces may not fly for most employers or workers. However, coworking provides a solid blueprint for the office leases of the future: more flexible terms, more flexible space; the ability to mix and match private offices, conference rooms, dedicate open floor space, and hot desks to meet the specific needs and hybrid working model of any employer.
One immediate impact of the pandemic and work-from-home trend: a widening gap between per-square-foot rates at Class A versus Class B or C assets. Better capitalized and mature companies who are calling workers back to the office require newer, more amenity-rich office space. With older assets undervalued, conversion and redevelopments may offer lucrative options for investors, especially if they are able to pursue timely strategies such as those noted above.
In aggregate, the office vacancy rate held stable at 15.7% through February 2022, while the construction pipeline shrunk to 147 million total square feet. As the dust settles on the pandemic, growing companies seeking hybrid office space may be underserved, creating opportunity for investors, particularly in tight CBD markets where Class B or C assets can be redeveloped and repositioned.
In short, work from home will continue to shake up office real estate markets. We don’t know what the long-term equilibrium will look like, but in any case we believe investors can capitalize through creative business plans that offer office tenants flexibility and rich in-office experiences for workers.
Work-from-home affects more than just the office sector
Hybrid work models mean that employers can make different choices about where to hire, and employees can make different choices about where to live.
As of March 2022, two years after the pandemic started, the data on migration is fairly muted: Americans are now slightly less likely to want to live in a city, and in aggregate the pre-pandemic patterns of net migration have continued: suburbs gained a bit, cities lost a bit, roughly mirroring the trend between 2016 and 2018. Major cities like New York and San Francisco continue to lose population to lower cost-of-living tier II and tier III metros, particularly in low-tax “sunshine states” like Texas and Tennessee.
Again, the pandemic has seemingly had only a modest effect on a trend that was well underway: the new work from home paradigm is spreading tech jobs across the country, albeit gradually.
- Multifamily markets in suburbs and more affordable metros — like Phoenix or Nashville — will stand to benefit as tech workers seek more space and lower cost of living, particularly if single-family housing markets remain hot, putting upward pressure on apartment demand.
- Opportunities for bespoke retail and mixed-use space (including tailored coworking/collaboration space) may emerge in growing Tier III metros and transit-ready suburbs of larger metros.
- Higher aggregate rates of “work from home” will put an onus on multifamily developers and operators to introduce dedicated workspace into design, either in individual units or common areas.
Real estate investors are wise to look for leading indicators of tech worker migration. Establishment of tech incubators, expansion of universities, adoption of mass transit plans (such as the light rail expansion to Seattle’s suburbs) may drive multifamily demand as work from home prompts movement of younger tech workers out of central urban areas.
¹Source: NPR (as of February 17, 2022)
²Source: CommercialEdge (as of March 17, 2022)
⁴Source: Global Workplace Analytics
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
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