Is the office sector dead? It’s a difficult question to answer. With America’s extended COVID-19 battle turning many office towers into vertical ghost towns and the acceptance of remote work growing among employees who have been working in their pyjamas since April, office space certainly appears a less valuable asset than it did a few months ago.
Some, however, like LightBox principal analyst Dianne Crocker, believe worries over the future of the office sector are overblown.
"While COVID has certainly triggered widespread changes in how companies think about office space, it won’t make offices obsolete,” she told MPA by email. “The real challenge for office owners will be to either give existing tenants compelling reasons to renew leases and maintain their current footprint or think of creative ways to repurpose their space to meet demand for other uses, like coworking or storage.”
Over the longer term, Crocker expects to see a more efficient use of office space that provides diverse options for employees, turning the average office into “a strategic tool” rather than just a workspace.
While Crocker says she has noticed a migration away from downtown offices to suburban locations, she feels CEOs “may opt to not abandon a downtown office location entirely, but instead elect for a smaller one downtown while also opening smaller, satellite suburban offices."
But at least one expert sees remote work having a pronounced, long-term impact on the demand for office real estate. Moe Vela, chief transparency officer at TransparentBusiness, a firm providing solutions for managing remote work teams, says working from home will, even if the coronavirus is brought under control, lead to a dramatic rise in unwanted office space.
MPA spoke with Vela on Friday. The following interview has been edited for length and clarity.
Mortgage Professional America: Let’s start with the big question: Is working from home going to make office space obsolete?
Moe Vela: To answer that, we have to go back to square one, which is, I think, that remote work is our new normal. And I think it’ll be our normal moving forward post-pandemic. I predict that it will not be 100 percent. I think we’re going to be living in a hybrid world of remote and traditional.
Office space will not become completely obsolete. Will the sector and the industry be impacted? It already is, and it will continue to be. You’re going to ultimately have 30 to 50 percent of office space become vacant.
MPA: There was a dramatic 69 percent year-over-year drop in office transactions in July. Does a recent drop in transactions necessarily mean a long-term drop in demand? Or is it more of a reflection of an inability to complete transactions during the summer?
MV: I think it’s more of a long-term situation. But I don’t think it will continue to drop. I think it will level off and remain at the levels you’re looking at now.
Let’s talk about the challenges, by the way, because it directly affects the drop in transactions and such when it comes to the commercial real estate market. For commercial real estate owners and landlords, in order to get their tenants to bring their workforces back, think about the challenges that confront them.
It's not just an employer and the landlord and the owner saying, “Your office space is sanitized.” That’s not enough. Everyone’s touching the door handles at the front entrance. Everyone is touching elevator buttons. You can’t socially distance in an elevator. Everyone is touching the front desk where they have to swipe their badge.
Surfaces are being touched in every part of the ecosystem in commercial real estate: The conference room table, your break room, the refrigerator door, the bathroom. The challenge is monumental, and for that reason I believe that you’re going to see [demand] level off and occupancy rates are going to remain dramatically lower than they were pre-pandemic.
MPA: Don’t some of those concerns go away when a vaccine gets rolled out?
MV: I don’t think so. I’m told very clearly when I get my flu shot that that is not a guarantee that I am not going to get the flu. Very few vaccines are 100 percent foolproof. Until we get the virus under control through testing and tracing and people are participating in mask wearing and preventative measures, I don’t think a vaccine is the end-all, be-all. I don’t think it solves all of the challenges to the commercial real estate market.
MPA: Some influential tech companies are shifting to remote work models. Could you tell me a little bit about which companies are making that shift at a larger scale and why that might be significant for the rest of the office sector?
MV: With tech companies, especially in Silicon Valley, there tends to be a contagion effect. You already saw Twitter, Slack, and companies like that announcing that they were going to stay in a remote workforce model for the foreseeable future, and several of them already said that they plan to stay at least partially in a remote workforce model after the pandemic. Large tech companies are acknowledging, “Why would we not stay in this? It works.”
The Twitter’s and Slack’s of the world, and I think Facebook and Google, are remaining partially remote. To me, those are indicators that the millennials in the last ten years may have been onto something, because millennials have been asking to have the ability to work remotely for a long time. We wouldn’t have had the WeWork spaces of the world grow so rapidly over the last five years if remote workforce wasn’t working. We had to find out involuntarily that it actually does work.
MPA: What’s going to happen to all of this empty office space?
MV: To the commercial real estate space, I say these types of sectors have ways of adjusting and transitioning and reinventing themselves. They’ll find the use of that space in some other way.
But there’s one very important underlying premise that a lot of journalists are leaving out, and that is that remote workforce models don’t work unless it’s knowledge workers or computer-based workers, so you will always have demand for office space for folks that don’t fall into those two categories.
MPA: What are the benefits of a remote work model for office tenants and business owners other than getting out of their leases?
MV: To be really blunt, everyone but the commercial real estate market benefits from a remote work force. Employers benefit because they actually save, on average, $11,000 per year per employee in a remote workforce model because all of their office-related expenses are dramatically reduced, from rent to equipment to energy bills.
They also benefit in other ways that are not financially-related. For example, absenteeism goes down dramatically. Morale goes up dramatically. And the key factor that most companies love about the remote work model is productivity goes up.
MPA: How strong do you believe the desire to work from home is among the average American. I know I hate it. I don’t like having my home and work braided together like this.
MV: My assessment is that the desire to work from home and the satisfaction of working from home is higher today than it was before the pandemic. Most people have a taste for it now, and I think more people than not love the flexibility, they love the comfort, they love the improved work-life balance. I think they love the ability to have some control over your daily schedule. And, as silly as it sounds, people love being able to make their own lunches in their own kitchens. They love getting to wear their house shoes and their warm-ups.
With you, you’re a good example of people who don’t like it. It usually stems from the feeling of too much isolation. People miss the social interaction and that ability to interact and feel connected to their colleagues at work.
MPA: I definitely feel all of that. But it is nice work without pants on.
MV: Absolutely. I think it would be really fun to do a study of how many people are wearing pyjama bottoms in their daily Zoom calls.