Office Sector Next Shoe to Drop After Retail?

Have long thought this. With everything going on, people are working from home, videoconferencing, and being productive remotely. So my theory is being validated. Millennials and younger prioritize flexibility. Office space can be costly and gets outdated every 10 years or so. As a matter of fact, companies looking for cheap and/or quality talent would benefit from a regional/national/global work force, which goes against sprawling office campuses. WeWork blew up (in good and bad ways), but the business model can work. It seems to be working for small players.

Some companies (especially tech) report higher employee retention, satisfaction, and productivity. Dell is a good example. Saves a ton of money and is cheaper to recruit personnel. Such flexibility could be good for the economy and may provide opportunities for lower income people.

Time to short office REITs?

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Comments (54)

Mar 17, 2020 - 6:41pm

Generally agree but I feel this trend will more acutely affect B / C product. Tenants in well located, amenitized office buildings are no strangers to remote work. In the last 3-5 years landlords / users have been heavily focused on creating work spaces that make the office a more appealing place to work than your couch.

Mar 18, 2020 - 1:17am

Well that's just like retail trying to make the experience more "personal" to distinguish itself from digital.

Transition is on-going, inconvenient, and uncertain. Yikes.

B/C products are mostly your independent lawyers, doctors, accountants, etc. In other words, professionals that need space to conduct business. And their rent/lease obligations aren't usually too burdensome. But obviously you won't find any investment grade tenants in B/C properties.

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Mar 18, 2020 - 8:43am
Well that's just like retail trying to make the experience more "personal" to distinguish itself from digital.

Which has worked, for the record. Good retail hasn't died at all.

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Mar 18, 2020 - 8:44am
Champagne Sipping:

I think we're heading to some blend between remote and in office.

Without a doubt.

For a lot of companies, that blend already exists and is highly effective.

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Mar 17, 2020 - 11:17pm

Office will be hit twofold: (i) companies go under / downsize due COVID-19 and (ii) companies downsize space out of choice due to realizing they need less space because more people will work from home. Ultimately, all of this will drive for lower demand in office space across all major metros.

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Brill: I blew up the building.
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Mar 18, 2020 - 12:11am

In the office space so maybe a little biased - but this last couple of weeks have really reinforced the benefits of having an office to go to. So many screaming children and barking dogs on the other side of conference calls, and I personally feel like a bit of a piece when I'm still working in my gym shorts at 5 oclock in the afternoon. I don't think that technology is the impediment that is keeping us attached to our offices.

Mar 18, 2020 - 1:10am

No doubt, but my opinion is that space will be dramatically reduced. Companies that can afford it will have one flagship office building. Everywhere else will be modest shared space that employees can access. Most employees would likely work remotely at least once or twice a week if not more anyway.

If you really need to work away from home regularly, I see people at Starbucks for hours at a time. Or you can get your own office "suite", which can be slightly pricey.

Mar 18, 2020 - 1:39am

Industrial servers will continue to perform. Tons of SWE jobs posted as the WFH infrastructure ramps up. I think we will see more WFH moving forward (pre COVID-19), but not the levels they exist right now. Netflix posted quite a few jobs in a 24 hour period

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Mar 18, 2020 - 6:51pm

Agreed. Seems like many people working from home this week are celebrating the fact that they returned an email same day and calling it a win. Won't be tenable for most industries when the economy ramps back up (and companies that say they were already doing it and achieving max productivity are lying to themselves).

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Apr 10, 2020 - 1:57pm

Additionally, any productivity that people are getting was formed on the back of relationship building and knowledge transfer from being face to face in an office. So much happens serendipitously in an office environment, wfh works initially but what about new hires, when a new project is started, etc.? Being able to just chat over lunch or pop your head into an office randomly is so valuable.

Apr 10, 2020 - 3:33pm

I think what you are going to see is a gradual movement of back-office and support roles to virtual, and consolidation of forward facing personnel into smaller but higher quality space. I completely agree that from a productivity standpoint, working from home is a challenge. However, I'm also in a forward facing role where most of my day is meeting/talking to people. The accounting team? Probably don't need to be in the office more than a handful of times a month. What I am curious to see is how many companies move to a hybrid of the two, where three days you are in the office but two can be WFH days. My finance's job allows her to do that and she loves it (on the WFH days). That would allow companies to shrink their footprint somewhat while but not lose the productivity of working from the office.

Mar 18, 2020 - 6:55pm

Not exactly a huge office space, but to your point: if this WFH situation isn't a fiasco, it would be odd if things reverted after everything stabilized.

NYSE to shift fully to e-trading from Monday after two coronavirus cases

> March 18 (Reuters) - The New York Stock Exchange (NYSE) will temporarily close its trading floors and move fully to electronic trading from Monday, its owner Intercontinental Exchange Inc said after an employee and a trader were tested positive for the coronavirus.
> ...
> "Our markets are fully capable of operating in an all-electronic fashion...and we will proceed in that manner until we can re-open our trading floors to our members," NYSE President Stacey Cunningham said in a statement.

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Mar 19, 2020 - 2:12pm

I might be a little biased but does anyone else see this killing off co-working environments and making employers think twice about overcrowding offices? Maybe some users will demand more SF per employee.

Mar 19, 2020 - 4:41pm

Eh. How would working in a co-working space in this crisis, or a different pandemic, be any different than working in a traditional office?

As far as SF/employee, I wonder what impact this will have on work from home policies. On one hand, the flexibility is awesome and definitely helpful. On the other, I can't imagine productivity being as high as in an office setting. I wonder if thoughts on remote working will swing one way or another, or if it'll go one way for some companies and the complete opposite for others.

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Mar 19, 2020 - 5:54pm

Less people within breathing/sneezing/coughing distance of one another. I'd also think physical barriers are helpful in reducing transmission.

I'm not saying the amount of extra SF required to have a meaningful impact on transmission rates would be economical or feasible. But I do think there will be a new found love for private offices among execs. That ~10-15% extra SF per employee might do very little to reduce transmission rates but it may buy some false peace of mind.

Mar 23, 2020 - 12:11am

nope - people are starting to realize how horrible working from home is and productivity not being what it was in an office setting working around colleagues. We are social animals at the end of the day and I am witnessing many people who are WFH right now that are wishing to go back to their workspace in the office.

We need offices to draw the boundary of work versus home time. We also like routine - wake up, get ready, commute and do work in an office setting.

Biggest takeaway from COVID 19 is the confirmation of why offices are still a thing in 2020 and why projects like HY are successful

Mar 23, 2020 - 7:48pm

Well I think lack of productivity mostly has to do with the fact that virtually everyone is distracted by the Coronavirus. I can tell you my group's deal pipeline is completely frozen. Some of my co-workers are stuck with spouses/kids/parents, so that doesn't help. Lastly, everyone is pretty much stuck at home which makes its exponentially worse.

I don't think office real estate will go completely obsolete, but I can tell you many are impressed with their recent discovery of Zoom and the like. And if this outbreak leads to a recession, you can count on companies looking to cut costs any which way.

Apr 12, 2020 - 8:31am

Is it time to short office reit? The question begs which kind of office reit but even generally my gut would say no. They're already down about a third from highs and I think there are better risk reward elsewhere in the market. If you whole heartedly believe your thesis that a substantial mass of companies will no longer need offices after this go ahead, but I think the effects will be much more marginal than that and buying puts or shorting after such a large correction seems like a risky way to invest.

Apr 12, 2020 - 9:38am

I've been having this conversation with an old manager of mine who works at a REIT in London focusing on office space.

While you could argue his view could be prone to bias given the above, he was saying how unproductive the company has been at large since others have worked from home. He said there's been a noticeable drop in efficiency compared to normal levels.

I currently work in a RE consultancy and have to say that so far I agree. Motivation for me simply isn't the same compared to when I'm in the office. What's more is that since the efficiency of everyone else is reduced, I know I can get away with it without eyebrows being raised.

While this may not be the same for others, it's made me begin to believe that constant WFH isn't tenable. Maybe once a week would be fine, but otherwise my productivity is terrible.

Apr 15, 2020 - 1:44pm

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