One of the biggest questions on everyone’s mind is “what does the future of work look like?”. We’ve gone from a world in which the office was a place an employee visited daily, no questions asked, to a world in which the office is just steps away from one’s bed. The first few weeks post COVID-19 were tough for most people – after all, how productive can you really be from home? Turns out, many people can be even more productive. Not only does working from home eliminate commute time, creating more time “at work”, but also there are tools like Zoom, Google Drive, and Dropbox helping to make the transition as seamless as possible.
The more productive employees can be at home, the more we all can’t help but wonder what will happen to office space. Google is letting its employees work remotely until at least July 2021, and Twitter is letting its employees work remotely indefinitely. More and more companies are following suit. This has to be affecting CRE landlord’s anxiety levels, right?
In this post, we’ll take a look at some of the data at our disposal regarding remote work and go over why we think offices aren’t going anywhere, despite initial fears that the asset class might be in trouble.
First, let’s start with our survey results from last month. From the small (<100) sample size, ~67% of respondents were more productive from home. However, 100% of respondents would like to go back to the office at least 2x / week with proper safety standards in place (i.e. contactless doors, privacy panels, health screenings, etc). This indicates that productivity isn’t the only factor in deciding the value of a separate office, outside of one’s home. The fact is, office amenities (i.e. high speed and reliable internet, printers, free coffee, etc) can’t always be beat from home. For many, the most important office amenity is social interaction. Humans, generally, are social beings. Many of us don’t like being alone all day. In person interactions stimulate our brains, and help increase collaboration and creativity. Moreover, firms like Apple, whose products are confidential, pushed to get back to work as soon as possible for privacy reasons.
Second, let’s go through a quick case study of Nine Four portfolio company, Branch Furniture. Branch is a digitally native B2B office furniture company that effectively saw its sales channel shut off when offices around the country closed down. Needless to say, Branch’s team had to act fast. The scrappy team was able to spin up a fully operational work-from-home sales channel within a couple of weeks. Even better, they grew the new D2C channel to be just as effective as the B2B channel, and now have 2 fully functioning revenue streams. Now, as we approach the fall, Branch is starting to see the B2B funnel heat back up. The fact that Branch is seeing inbound inquiries about large, new office furnishings, is good news for the CRE landlords – office as an asset class is not going away!
Next, Facebook announced it will be renting a 730,000 office lease in Manhattan. Clearly, although Facebook has extended its work from home policy in light of COVID, it sees value in having a physical office for its employees. Similarly, Amazon recently announced an expansion of its offices to the tune of 900,000 SF in New York, Phoenix, San Diego, Denver, Detroit and Dallas, to bring in an extra few thousand new corporate jobs.
Additionally, the chart in table 1 from NAREIT research shows the share of typical rent received from April to July 2020, divided by asset class. As expected, retail (and most likely, hospitality, which isn’t shown in the chart) was hit the hardest – May being the worst of rent collections, at about 50%. However, although as people settled more and more into their new remote work lifestyles and the office seemed like more and more of a distant memory, rent collections for the office asset class only dipped to 92.5% at its lowest, indicating that things were never really as bad as we may have thought. Since then, things have looked up, and rent collections now hover at around 96-97%. This points to the fact that tenants have faith that they’ll get back to the office.
The question now, at least for us, has turned away from “will tenants go back to the office?” to “how much space will tenants need when they go back?”. With more and more people being comfortable working from home, we’re inclined to say that many office tenants will resign their leases for a smaller footprint. With alternating attendance schedules and more flexible work from home guidelines in place, businesses won’t need the same large footprint they once did. In talking to companies tracking office utilization data, the data seems to suggest the same, pointing to about a 30% decrease in space as a result. On the other hand, although businesses may require fewer people in the office at any one time, each person will likely require more space to stay safely distanced for others. The tension between these two facts leaves us probably somewhere in the middle.
Pre-COVID, the norm was for businesses to have an office, with an option to work from home once in a while, if necessary. Personally, I believe this notion will be flipped on its head, and we’ll move to more of a work-from-home as the norm, and come into the office as needed, culture. Overall, I think remote work has given us another option – to work from home –I don’t think it’ll ever replace the office, as many people were concerned it would at the start of the pandemic.
