Why Lease Office Space When You Can Work from Home?

A recent article from CNN, “The Office, As You Know It, Is Dead”, suggests that working from home may not be a short-term phenomenon, but instead a permanent shift to remote working even after a vaccine is found for Covid-19.

The report claims there are several reasons why the demand for office space is drying up: employees don’t need to work from a cubicle to be productive, and companies are focusing on reducing office footprints by digitizing operations.

In addition, businesses are able to justify paying less for talent that lives in Omaha or Fort Wayne versus high cost of living cities such as New York or San Francisco, which means a lower demand for office space in major metro central business districts.

While it’s true that where you live isn’t as important as it used to be, it’s also likely true that the pandemic’s expected effects on the office industry are overstated. As the saying goes, “There are three sides to every story: your side, my side, and the truth” which usually lies somewhere in between.

Evolution of Office Space

By most accounts, the open-plan office and cubicle that we know today have origins dating as far back as ancient Rome. So, it’s logical to ask why an asset class that’s been around for nearly 3,000 years would suddenly disappear in less than one year.

To be fair, the commercial real estate industry has always been defined by major shifts. For example, spacious private offices as large as 250 square feet with long-term leases in central business districts were the norm a generation ago. Over the years, offices have shrunk to as little as 55 square feet.

Most recently, coworking spaces occupied by multiple companies on flexible leases helped tenants to increase collaboration and reduce costs, while landlords were able to increase NOI by partnering with coworking companies.

What the next evolutionary cycle of office space will be remains to be seen. As Fast Company notes, the future form of office space will develop around several key factors:

Foundation for company and team culture

  • Working solely from home destroys the culture of flourishing companies
  • 88% of workers have experienced moderate to severe stress, while 70% say they are less productive working from home, across all industries (EBN)
  • Majority of millennials and Generation Z employees feel less connected to coworkers when working from home, denying them critical mentoring (Partnership for New York City)
  • Growing difficulties in collaboration, onboarding new employees, and team management are making it evident that a 100% remote workforce isn’t sustainable in the long-term

Flexible space solutions

  • Workers come into the office for a reason instead of out of obligation
  • Office space serves as a purpose-driven hub for productivity, collaboration, and connectivity
  • Flexible office solutions can also be private, by limiting use to individual companies or work teams at any given time, unlike the traditional coworking business model
  • Many companies may be unwilling to sign long-term leases of five years or more due to the risk of future crisis

Hub-and-spoke office model

  • Headquarters will be downsized due to reduced day-to-day office needs
  • Spoke offices in suburban or secondary markets will maintain company culture without the commute
  • Network of specialized spaces including small conference rooms for client meetings, and large spaces for full company events
  • Companies launched during the pandemic are used to being 100% virtual and may always prefer on-demand office space

Pros & Cons of Working from Home

Long before governments around the world opted to shut down their economies in an effort to control the pandemic, remote working was already on the rise due to company cost savings and perceived benefits.

Global Workplace Analytics (GWA) is a research and consulting firm that helps employers understand and prepare for the future of work. The firm has reviewed over 4,000 studies, reports, and articles to analyze the pros and cons of working from home:

Pros of working from home

  • Improves employee satisfaction by providing a balance between work and life
  • Reduces attrition by eliminating the time and cost of commuting
  • Flexible hours allow employees to reduce unscheduled absences with more time for running errands or dealing with family issues
  • Increases productivity by up to 40%, according to some companies like Best Buy, Dow Chemical, AT&T, American Express, and Compaq, though the data is mixed depending om the type of work
  • Saves employers money from lower relocation, real estate, ADA, and regulatory costs
  • Reduces potential for discrimination and equalizes personalities, with employees being judged on what they do versus how they act or what they look like
  • Cuts down on wasted meetings while increasing employee empowerment and collaboration
  • Expands talent pool by reducing geographic boundaries, provides access to disabled workers, and offers an alternative to employees who are also parents or senior caregivers
  • Reduces staffing redundancies by allowing employers to quickly sale-up and scale-down as needed

Cons of working from home

  • Although most managers trust their employees, many would like to be able to see them occasionally “just to be sure”
  • Working from home doesn’t work for all employees – workers must be self-directed and motivated, have social needs addressed, and have defined home office space
  • Upward mobility within the company may be limited due to “out of sight, out of mind” mentality of management and the difficulty of building relationships remotely
  • Co-worker jealousy may occur if some employees are allowed to work from home but not others
  • Data security issues may be difficult to address, although most large organizations believe that home-based workers are not a security concern
  • IT infrastructure changes to access company systems, software, and data may be needed to make working from home effective
  • Inability to monitor employee overtime, and compliances with employment law and OSHA are also concerns for businesses that allow employees to work from home
  • Local zoning may also be an issue since some communities and HOAs prohibit home offices
  • Double-taxation can occur in some cities and states when employees pay taxes to the state where they are working from home and to the state their company is located in (CNN)

Productivity pitfalls of working from home

Setting aside the unintended consequences of increased regulatory risk and double-taxation, plummeting productivity may very well be the biggest drawback for companies who allow employees to work from home all of the time.

A recent article by Stanford economist Nicholas Bloom notes that despite the potential advantages of the work-from-home movement, a slump in worldwide productivity could threaten economic growth for many years:

  • Working from home with children is a productivity disaster when distance learning forces parents to also become full-time teachers
  • Bedrooms or shared common rooms aren’t a replacement for office space due to lack of privacy and background noise
  • In-person collaboration is necessary for creativity, innovation, for developing new ideas and keeping staff motivated and focused
  • Lack of new ideas created through traditional collaboration could result in fewer products and services and lower economic growth over the long-term
  • Feelings of isolation, loneliness, and depression can kill office productivity while building a mental health crisis

Will the Demand for Office Space Change?

In a recent article published by the Federal Reserve Bank of Atlanta (FRBA), business demand for office floor space going forward will be nearly unchanged. In fact, 80% of the office users surveyed – businesses in insurance, finance, information, and business service sectors – see no change in their current floor space needs.

That’s quite a bit different from a few months ago, when pundits were speculating about the demise of commercial real estate and office space demand due to Covid-19.

To be sure, tenants may change their mix of office space by shifting from high-rise buildings in dense urban areas to suburban office parks. But changes in use align more closely with expected growth than with the number of employees working from home.

Companies will need more office space, not less

Former Google CEO Eric Schmidt disagrees with the FRBA, but in a way that’s positive for office building investors. According to Business Insider, Schmidt thinks that there will be a greater demand for office space post-pandemic, with the desire for social distancing within offices placing a premium on office space.

The density of global megacities will change, as employees at the same firm work from different locations. Flexible arrangements with some employees going to the office, others working from home, and still others working from a hub-and-spoke location will reverse the recent pattern of people moving to concentrated supercities.

As Schmidt observes, “We’re going to have to think about hub-and-spoke systems where local people don’t travel so far because they don’t want to be in public transit for so long. So we’re going to have to really rethink how businesses operate. They need their employees back.”

Small business hiring climbs to pre-pandemic levels

Small businesses provide almost half of all jobs, based on the most recent data available. In a recent report prepared by the Congressional Research Service (CRS) for Members and Committees of Congress, small employer enterprises with fewer than 500 employees provided 47.1% of all jobs in 2017.

So, the fact that U.S. small businesses’ hiring plans have reached pre-pandemic levels should bode well for owners of commercial real estate and office space. Last month, Bloomberg noted that 21% of small firms were planning to create new jobs, and 33% had open positions they were unable to immediately fill. The labor market is recovering and moving in the right direction, and payrolls are also on the rise. According to the National Federation of Independent Business (NFIB), 18% of the firms surveyed raised compensation this summer while total payrolls increased by 1.35 million.

Where Office Use is Growing

In many office markets, demand is stagnant with occupancy declining and sublease space increasing. However, there are some individual office markets that are bucking the trend and seeing a growing demand for office space. As GlobeSt.com reports, high-value office assets in markets such as Jacksonville and Tampa are trading hands at the lowest cap rates, as investors seek safety and stability.

Cushman & Wakefield’s Q3 2020 U.S. Office MarketBeat report analyzes the most recent quarterly commercial real estate activity including supply, demand, and pricing trends. While major markets such as Boston, Dallas, San Francisco, and Midtown Manhattan experienced a significant drop in office leasing demand, some secondary office markets in Florida are performing very well.

So far this year, nearly 2.4 million square feet of office space has been leased in Tampa and almost 500,000 square feet in the St. Petersburg/Clearwater market. In fact, year-to-date leasing activity in Tampa and St. Petersburg is greater than in larger Florida office markets such as Orlando and Miami, and even Downtown New York City.

The fact that New Yorkers are leaving the City for Florida should come as no surprise. A recent article in Forbes reports that in 2018 the New York metropolitan area was losing an average of 100 people per day, mostly to Florida.

Today, the outward migration from New York City to Florida is closer to 270 people each and every day. Post-pandemic, the trend to Sunbelt states will likely accelerate, with Florida leading the way. Residents and businesses save more money in Florida, taxes are much lower, and Florida simply hasn’t seen the civil strife and recent protests that people living in the tri-state area have had to endure.

Future of the Office Workplace

Only 12% of U.S. workers want to work from home full-time, according to insights from Gensler’s U.S. Work From Home Survey 2020. The survey studied the current experience of working from home during the pandemic and how the experience is influencing worker and employer expectations for the future workplace.

Rather than working from home becoming a long-term trend, 70% of employees in the U.S. want to work in the office for the majority of the week, provided that changes in the workplace are made to address social distancing and reversal of the growing densification of office space before the pandemic.

As we move forward, it’s likely that the future office workplace will include more desk space, less desk sharing, and more autonomy by giving employees the flexibility to work from home as needed.

A growing number of businesses both large and small will begin using a hybrid hub-and-spoke model or physical office space in less urbanized secondary markets where the quality of life is high and the cost of living and doing business is low.

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