The Office Is Not Dead—Just Evolving—and Definitely Here to Stay

Written by: Tal Peri, Head of U.S. East Coast and Latin America, Union Investment Real Estate

The current unprecedented pandemic has impacted many facets of the real estate landscape, and the office sector will be no exception.

The severity and direction of these implications will vary based on the time horizon (short-, medium-, or long-term), location (strong micro-location vs. fringe, urban vs. suburban), building quality, building age, and many other factors that define the attractiveness and value of an office building.

The current discussion about the future of office demand is mainly based on surveys or anecdotal evidence like statements from business leaders or a small sample set of actual lease decisions, and even those decisions may be short-term in nature.

There are valid arguments on both sides. Below are some common points in the ongoing conversation. 

Positive Market Forces

De-densification due to social distancing: In the short term, de-densification to accommodate social distancing rules has a positive effect on office demand as some companies are choosing to rent additional space. This should partially result in a long-term pattern due to an increased focus on health and well-being.

De-densification as a general trend: Over the last three decades, office density went from 300 square feet per employee for the average office user to as low as 75 square feet in the case of some co-working operators. For example, since 2010, office-using jobs in NYC increased by 30%, whereas office demand only increased by 8%. While some of the more extreme density is driven by economics and affordability,  there is a general expectation that more companies will revert and de-densify their spaces for productivity reasons, in addition to health.

Delay and reduction in future supply: Office developments that are already under construction will certainly be completed, but as a response to a potential adjustment in demand and rent levels, future developments will slow down over time and lead to a new equilibrium. This will especially apply to speculative developments.¹

Negative Market Forces

Recessionary impact: Recessions lead to bankruptcies, right-sizing, and a suppressed appetite for expansions with downside pressures on office demand and rental rates.

Hub-and-spoke model: Occupiers will likely retain their main headquarters but reduce their footprints in densely populated city centers, while offering their employees flexibility by granting them access to a secondary office or co-working location closer to home.

Working from home (WFH): The longevity and depth of the adaptation of WFH policies will arguably be the most relevant factor for future office demand. This warrants a deeper dive.

Advantages and Challenges of WFH 

Advantages: The implementation of WFH during the pandemic has undoubtedly worked better than many had anticipated and should lead to an increased adaptation of more flexible work models. The often-cited advantages are lower-to-no commute times, flexible working hours, and with those, an improved work-life balance.

Challenges: Certain drawbacks that come with the WFH paradigm should limit extreme adaptation of WFH and will protect office demand in the long term.

The “mass experiment” of WFH during the pandemic has happened under a sterile laboratory-type environment, with entire workforces of non-essential companies working from home. Everyone was forced to work from home and the playing field has been equal within companies. But many complications arise once companies apply a WFH policy with no physical presence for a fraction or the entirety of their workforce, as well as if the duration of WFH is extended. The following examples are prominent:   

• Information flow can be asymmetric and lead to dissatisfaction and a feeling of disconnection. For senior-level employees, this could result in an imbalance in decision-making and an exacerbation of political tensions, as employees who are not physically present could lose influence. This may apply in the case of promotions, layoffs, and other organizational decisions.
• Employees, especially those in lower ranks, will miss out on training opportunities and the ability to spontaneously join meetings and learn soft career-building skills.
• The hiring process becomes more complex in a virtual world with employees potentially living in another city or state than their managers. This also complicates the creation and maintenance of a corporate culture and team unity, which in turn may reduce loyalty to a specific employer, as job changes across state lines may not even require moving the primary residence.
• Questions surrounding motivation and distraction, which ultimately may lead to productivity losses when purely WFH. Personal living conditions vary by economic situation and stage of life, and can therefore complicate a productive work setup, which is already lacking inherent structure. Parents working at home may be encumbered with childcare responsibilities, and others may be distracted by roommates in a relatively small city apartment without privacy or physical working space. Not all remote working is created equal.
• Lack of a work persona that breeds an office-based social world where friendships and even deeper personal relationships are forged.

Though there are many more arguments on both sides, an office environment is sure to offer inimitable benefits with regard to productivity, creativity, motivation, corporate culture, and social interaction that will remain relevant and important for employers and employees in the long term. This explains why big tech companies create “office meccas” with extensive amenities and company cultures that spur many of the aforementioned positive aspects. Co-working companies, in the same vein, literally took people out of their homes or nearby coffee shops and placed them into an office environment. Once the health crisis subsides with a lasting medical solution, we should see a strong re-engagement in the office space.

The below recent survey results are only three of many indicators for this belief: 

• Colliers surveyed 5,000 clients and found that only “12% want to work for 4+ days from home post-pandemic.”²
• Savills surveyed 65,000 clients and found that “89% of respondents believed that physical office space remains a necessity for companies to operate successfully, but the office is set to change.”³
• JLL surveyed 3,000 clients and found that “58% of office workers missed the office, a sentiment expressed by an even larger percentage of those 35 and under.”⁴

Looking ahead, while we can expect a somewhat increased adaptation of WFH and other flexible policies, the office is certainly not dead—just evolving—and definitely here to stay.

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¹ CBRE weekly take, June 26, 2020. Both Matt Khourie, CEO, Trammell Crow Company, and Mark  Wilsmann, Head of Equity Strategies, Metlife Investment Management, stated that they will slow down or halt future office developments that are not “heavily pre-leased”. See transcript at https://www.cbre.com/-/media/files/the-weekly-take/CBRE_ep14_Construction-Built-To-Survive.pdf.

² Costar Article .“New Surveys Pour Cold Water on Notion That the Office Is Dead” – June 2020,  https://product.costar.com/home/news/shared/159384505?utm_source=newsletter&utm_medium=email&utm_campaign=personalized&utm_content=p3 - referencing the Colliers International Report “Exploring the post-COVID-19 Workplace” - https://www2.colliers.com/en-LV/Research/EMEA-WFH-Survey-Report.

³ Savills News, June 2020 - https://en.savills.de/insight-and-opinion/savills-news/301232/Less%20time%20spent%20commuting%20sees%20Londoners%20working%20longer%20hours%20in%20lockdown.

⁴ Connect Media article June 2020 - “Post-Pandemic, Office Use Will Still Be with Us” - https://www.connect.media/post-pandemic-office-use-will-still-be-with-us/ - Referencing the JLL report “The future of global office demand” June 2020 - https://www.us.jll.com/en/trends-and-insights/research/future-of-office-demand#contact-us.