Someone explain to me commercial real estate during/post COVID
Completely new to this, but seeing how WFH/Hybrid is going to extend over the next year possibly, how has commercial real estate been doing?
I'm looking at manhattan offices and they are all empty, so wondering how long those landlords can hold out for
Does it matter if the office is empty if the tenants are still paying rent? Sure some companies will give up their office space because they are going to switch to a full time remote scenario, but for the rest they will have to keep their space if they have a hybrid structure.
All comes down to what you think the decrease in demand is going to be. 5%? Okay, that will be bad for current values, but the market will readjust, outdated office will be taken offline, and supply over time will reduce/change. 15%? That will lead to catastrophic outcomes for office owners because of how levered real estate is. I don't really see how COVID won't be as bad or worse for office than e-commerce has been for retail, especially because COVID's effects are going to be much more immediate than e-commerce's has been. It's going to be very market/submarket/type dependent, but I would not want to own commodity office in a lot of downtown areas. I think you're going to see many companies move to a model where they have small, very expensive, very built-out downtown office space surrounded by a lot of smaller offices scattered throughout other submarkets/cities. Tech's been doing this model for years and I think a lot of companies will follow.
I think there may also be moves to more international tenants in office spaces downtown. We own an office space in the LA suburbs and our leasing activity is very high on 6-7 year leases to where we've gained 6% in occupancy over Covid. A lot of the interest is from international firms though. We invest in office/industrial space, and I agree that the market you are in is very dependent on where tenants are moving. Downtown cities are struggling, but suburban markets are maintaining a bit.
IMO, the "hybrid" work model is going to be the future, which means office space (especially class A office space) will certainly still be in demand, although the amount of SF per tenant may decrease. At the same time, people aren't going to want to be stacked on top of each other, and there's already studies that say open concept is garbage for productivity, so it may all even out in the end.
I think permanent, full time work from home is going to be a rarity.
Depends on the employee - the smart companies are going to structure WFH policies based on what your role is. If I owned a company, I would be perfectly fine with back office / support / admin staff going full remote, because ultimately those jobs benefit less from being in the office. Accounting is probably more efficient working remotely than being in the office, from what I've seen, and let's be honest those jobs are typically pretty brutal so anything that you can do to enhance their quality of life is important. Also allows you to hire from a much larger candidate pool and from cheaper areas. Revenue producing employees will be more of a hybrid model, would be my guess. I for one would choose a job that paid less but didn't require me to be in the office five days a week than one that did but paid more. I think a lot of people once they start having families feel that way. Unless there is a specific reason that an employee needs to be in the office five days a week, I can't imagine too many companies requiring it because it just makes hiring more challenging without a beneficial tradeoff.
It comes down to productivity. Is the loss in productivity of hybrid or full remore teams less costly than the office space. If so it will continue, if not, well it will revert back. The problem with sites like this is the productivity bias is incredibly high. The vast majority of the workforce is not as effective at home as they are in the office. That doens't even take into account the productivity realities of things like being able to walk 10 feet and get immediate feedback from a colleague.
I personally think that offices are not going away and we will return to normal office use within the next 18 months.
IMO office is going to get absolutely crushed on a 5-10 year horizon. The true impact of COVID is not going to be visible for at least a couple of years, as the nature of presently effective long-term leases for office space make it impossible to see usage trends really evolve in real time, outside of new tenant requirements. Having one new office project we are trying to lease up, the market is toast and space requirements across the board are shrinking by 10, 20, 30%+ from a year and a half ago before office searches were frozen completely.
Anyone who thinks flexible work (3-4 days in office vs. 5, staggered team shifts, etc.) is not here to stay permanently in some meaningful capacity is nuts. Eventually, that will translate to companies realizing they can reduce their real estate expense footprint (one of the largest fixed balance sheet expenses) by accommodating this shift in the structure of how people work. It's a win-win for everyone--workers who want more remote flexibility get it, and companies can reduce their fixed expenses to accommodate the new dynamic.
As longer-term leases start to roll and big blocks of vacancy are not re-absorbed SF for SF, vacancy rates will start to rise, rents will drop, concessions will go up, and landlords will find themselves trying to sell a widely available commodity product at a huge discount.
One thing people still aren't thinking about enough is outsourcing. Once companies realize that fully-remote work is effective for some roles, they're going to wonder why they should pay a US worker rather than one in a cheaper country. The foreign worker doesn't even need to be as productive, as long as the productivity decrease is more than offset by the salary savings.
I know a company that has outsourced its entire back office to South America. Not even a time zone difference, and there's a pool of educated people who will work for substantially less money.
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