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The Work from Home Revolution: Implications for the Office Sector

Danny Ismail, Green Street’s lead office analyst, discusses the WFH movement and de-densification, key trends that will shape the office space for many years beyond the conclusion of the Covid-19 pandemic.

A new acceptance of work from home (WFH) policies has been swiftly ushered into workplaces across the globe. The coronavirus pandemic has impacted the office business in a variety of ways: a forced, large-scale WFH experiment, social distancing regulations, and a need for enhanced security and sanitation. However, while some of these trends may prove temporary, the experience has provided employees and employers with an opportunity to experience just how effective WFH can be.

The apparent success of the remote working experiment suggests the uptick in WFH will be a permanent shift in behavior. Further, office capital expenditures, already among the highest of all property sectors, may also further increase as the reconfiguration of the workplace puts pressure on landlord economics. Additionally, Green Street anticipates that a possible shift away from the densification trend will likely prove short-term given social distancing concerns, but eventually revert to a version of pre-Covid-19 normalcy as virus fears subside. In summary, a negative long-lasting impact on office operating fundamentals, especially in key gateway markets, is expected.

The Great WFH Experiment

The Covid-19 pandemic forced a dramatic change in personal and professional habits as remote working became a necessity. While increased WFH is not without its headaches, the preponderance of evidence suggests the future contains more, not less remote working. Management teams in a variety of industries – including tech, finance, and consumer goods – have embraced WFH. Many prominent tech companies have already made public comments that suggest a significant future increase in remote work.

Meanwhile, employers have found that employee productivity at home is equal to or greater than in-office productivity. Employees are also discovering that WFH has its advantages, including cut commute times and increased scheduling flexibility. Green Street's baseline assumption is that a significant number of workers will receive WFH flexibility as an employment benefit post-pandemic. The forecasted impact is modest: most employees will still work in the office daily, with a notable increase in those who go to the office regularly but not daily. This will likely cause a notable reduction (10-15%) in overall office space needs going forward.

blog-image-1The Future of Office Demand

Office demand will not only be influenced by the transition to more remote work (10-15% reduction in office demand), but may also be impacted by a turn away from densification. The trend, which ran rampant last cycle, saw employers squeezing as many employees as possible into the same amount of office space and shrink space needs per employee by more than 20%. Employers were able to reduce their overall office footprint and expenses while growing their employee base. A shift toward de-densification could prove a boon to office demand and potentially offset the impact of WFH. However, Green Street expects any reversal in the densification trend to be a short-lived but understandable reaction to ensure employee health. The longer-term usage of office space will likely revert to a pre-Covid-19 version of the office, meaning de-densification will likely not fully reverse course. However, investors should remain open-minded about a de-densification trend as this reversal could have material positives for the office sector.

Moreover, looking at the past may prove instructive to assess how long the WFH impact might take. In the last decade, densification likely shaved three to four percentage points off national office occupancy. However, the total impact took place over a decade, not quarters. The WFH impact may prove faster moving than the densification trend, given the wide-scale WFH experience, but will likely be a secular theme for most of the decade.

Additional factors to consider when assessing the WFH impact include organizational culture, corporate communication, and employee retention. These factors are incredibly important to the success of an organization and will likely prevent a fully WFH world.

blog-image-2WFH Impacts on Gateway Markets

Broader geographic shifts for office fundamentals are expected in the coming years. Green Street favors non-gateway markets for several reasons, including less economic sensitivity than gateway market counterparts, a lower cost of living, and better fiscal health.

The notion that a well-located office building full of highly paid workers in or near a dense, expensive city is the best way to operate a successful firm has been challenged by the acceptance of remote work. Employers and employees see more of their income lost due to taxes in gateway markets compared to Sun Belt markets, which has partially driven the recent large net migration towards the Southeastern United States. Coupled with an increase in individuals who no longer regularly go into the office, many more may consider moving further away from coastal city centers.

Those able to WFH on a full-time basis have the freedom to take their jobs with them. The WFH utilization rate measures the pre-Covid market-level desirability for remote workers. It suggests that less expensive locales with nice weather will attract talent from high cost and high tax markets.

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Green Street expects long-term office fundamentals to suffer from a permanent shift to greater WFH. The likely result is lower long-term NOI growth and a negative impact to expected returns for the sector. However, despite what the headlines say, the WFH movement is not the sole headache facing office owners, but rather, another risk factor to an already challenged business. Green Street continues to track and assess WFH impacts on office and other commercial real estate sectors. Gain additional valuable, up-to-date insights, including sector, market, and company-level recommendations, by contacting our team.

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