No. While increased remote working will certainly be a headwind for office demand, the notion that it will result in the “death of the office,” as some reports have suggested, seems unlikely given a number of mitigating factors.
In just a few months, COVID-19 has disrupted the way corporations operate. A notable outcome of the pandemic has been the realization that employees can work from home (WFH) productively. Video conference technologies have allowed the transition to WFH to be almost seamless and even enhanced collaboration in some cases. Employees have embraced eliminating their commutes and having more time with their families, while employers have begun calculating the potential financial savings from reducing their square footage. For some companies, the experience has been so positive that they have announced plans to transition their workforce to a more flexible model, allowing more employees to WFH on a more permanent basis. Investors have taken note; as of the end of May 2020, office REITs were down 27.8% for the year, almost twice the decline of the broader FTSE NAREIT All Equity Index, which was down 15.3%.
Although remote working will become more prevalent across many companies, it will not necessarily lead to the demise of offices. Employers do acknowledge that the WFH experience has been a success, but they note it has occurred in the context of everyone doing it, which has made the transition easier. WFH has worked well because employees already know who they are working with, having previously built those relationships in an office setting. There are real challenges associated with integrating new employees, mentoring and collaborating with colleagues, and building and maintaining a firm’s culture when most employees are WFH.
While WFH has benefits to employees, it also has drawbacks. Remote working brings potential mental health risks, including isolation and burnout. Many workers have described having “Zoom fatigue” and work days that seem to begin from the moment they awaken until the time they go to bed. Gensler, a global architecture and design firm, noted in a recent workplace survey that only 12% of employees want to WFH full time. Most want to return to the office but expect changes before they’re comfortable returning, including less dense workspace, more office cleaning, and stricter policies against coming in sick. Surveys have consistently shown that the typical employee would like to WFH one to two days per week, which suggests that offices will remain a crucial part of the workplace.
The need for decreased workplace density to comply with social distancing guidelines will offset to some degree the impact of more employees working remotely. The trend of companies squeezing more employees into their office space in an effort to control costs had been ongoing since the late 1990s. According to Moody’s, the average rentable square feet per office -using employee declined from about 250 in the late 1990s to about 140 today. Many office landlords, not surprisingly, have touted the reversal of this long-term trend as a boon to the sector, and some tenants also appear to agree. Former Google CEO Eric Schmidt said recently that he thinks the pandemic will result in more office demand, not less, due both to the need for reduced density as well as an evolution to a hub-and-spoke model, which will require more suburban office space for employees who want to reduce or eliminate commutes.
As many companies are only now beginning to return to their offices, it’s still too early to say how these various dynamics will ultimately play out. That said, the zeal with which many high-profile companies have declared the current WFH experiment a success strikes us as premature. As a result, any fear that COVID-19 creates related to office properties could yield attractive investment opportunities.
Marc Cardillo, Managing Director in the Real Assets Investment Group at Cambridge Associates