The future of office real estate

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Surprised to not see a thread on this yet, but is anyone here worried about the future of office real estate? Especially pure play office landlords, there is basically 0 acquisition activity going on right now, banks and investors are terrified of the asset class. In my opinion, just underwriting 0% rent growth for the next year or so isn't going to cut it. The typical office is going to look completely different post-Covid.

I know the argument "cities aren't going to just disappear", which I agree, lots of tenants are locked into long-term leases as well... would just like to get some opinions on what this community thinks the future of office landlords looks like

 

Comments (31)

 
Aug 30, 2020 - 11:35am

I think the office market will either be stagnant or decline over the years. You definitely won't see much increase in valuations going forward. Office won't just tank like retail. However, companies now realize being in the office 5 days a week is not necessary. You can easily implement a rotating schedule of 3 days in the office, 2 days at home. Or 2 weeks in the office and 2 weeks at home. Yes, there will be a loss in the company atmosphere and team building because people will work remoty but nonetheless, remote work is still often efficient and effective. A lot of people who are in denial over the decline of office are usually the ones who have a stake in the office market(office developers, investors, etc.). In NYC, there's a glut of office space under construction. When those projects are completed, the office market will be super competitive to attract new tenants or steal tenants from Class B office buildings. The only reason why there is optimism in the office market right now is because tech companies like Amazon, Facebook, Apple, and Google are still leasing large amounts of office space. Other than those companies, nobody is really leasing space. More companies are subleasing now because they don't need so much space anymore.

Array
 
Aug 31, 2020 - 11:04am

You can easily implement a rotating schedule of 3 days in the office, 2 days at home. Or 2 weeks in the office and 2 weeks at home. 

The problem I have with assuming this will translate to smaller space is that most people will still want a permanent desk for the days they are still in the office, work from home 2 days a week doesn't mean you only need 60% of the space. When I worked in construction most of the MDs and VPs would have a seat in the field trailer on their most important projects as well as an office/desk at HQ when they had to be there. You'd walk around HQ on a Tuesday morning and 20% of the offices would be empty but that's just because they were all on site, they'd still have their stuff permanently there.

Same exact thing with WFH. And if some firms institute a "rotating workspace" thing, I'm sure others will offer a permanent space as a perk, I know I'd much rather work at a firm where I get a permanent seat. 

 
Aug 31, 2020 - 12:31pm

Agreed, I hate flex space personally. Much more efficient to have everything set up in one place.

I suspect it will go one of two ways depending on the company. Some will keep permanent desks that will just be empty a lot of the time, and the company's space use will not drop. Others will condense into flex space. Since a lot of people won't like that, they'll WFH more, causing the company to shrink the space even more.

 
Aug 30, 2020 - 5:26pm

In BXP's recent Q2 earnings call, their CEO said that their buildings are currently less than 10% physically occupied. They have credit tenants and staggered leases, so that doesn't pose any serious, immediate threat to their revenue. But it's definitely not a good sign.

Anyone who claims to know what will happen is full of it. No one knows. This is the first time in human history when technology has enabled efficient remote work for huge numbers of people.

The bullish scenario is that most people want to get back to the office, and that most of the remote workers still come in part of the time. So companies still need the space. And their desire to cut space due to remote work is offset by the need to spread workers out for health reasons.

The bearish scenario is that lots of jobs could be fully remote. This could work even if it's less efficient: the costs of the inefficiencies just need to be less than the savings from reduced rent, and from cheaper employees in lower COL areas.

The even scarier scenario is that once jobs go fully remote, they go overseas. If factories can move to Malaysia, there's no reason the accounting department can't go to Manila.

 

 
  • Associate 1 in RE - Comm
Aug 30, 2020 - 6:46pm

I would argue they cant go there due to a skilled labor pool doesn't exist in a market like Manila or anywhere that people are generally referencing when they are speaking about jobs going overseas.  I think you could potentially see see firms moving from hiring people from high COL areas to low COL areas in order lower their payroll expense.  The question then becomes do you get the same sort of talent willing to work in those sort of areas?  I would argue no, some would argue yes, I dont really know.  I dont think it would get to the point of going overseas, unless its a full BO function that can.

I think gateway cities are in a rough spot when it comes to office.  Second tier / tertiary cities I think potentially benefit, so does suburban on some level.

But honestly I just don't think as many people work remote as people are anticipating.   I don't think its as efficient, its quite difficult to collaborate (putting together certain decks for deals at my job now take substantially longer than they did pre-covid), I just don't see it happening.  There are times when I enjoy it and times when I don't.  

 
Aug 31, 2020 - 3:11pm

This is not the first time in human history that technology has enabled efficient remote work. Not even close. IBM let people work remote for DECADES before ending it in 2017 because, surprise, employees were not as productive as when they are in physical locations. Yahoo, Aetna, Best Buy also ended their remote work policies. 

Array
 
Aug 30, 2020 - 6:45pm

Think FOMO, Fear of Missing Out..... This work from home stuff will get really untenable when some are going back and others aren't. Do you want to be the one not in the room for the meeting? Not bumping into coworkers and management and clients? This works now because we are all doing it, and I'm not sure it is really that productive. 

Think of all the die hard careerists on WSO, will they be willing to stay away from the office? No chance! Virtual onboarding seems like a non-starter even now (I feel for those having to do this)

Sure some will stay home permanently, but I doubt this will be the majority. Flexibility for a few days of WFH doesn't change space needs all that much, and frankly, the last ten years of office layouts have been getting denser and denser to accommodate this as part of the whole "co-working" trend. Some of this will reverse just by necessity (funny it takes a virus to realize sitting on top of each other is not productive.....). 

So to sum, it's hard to say, but I don't think we can actually live without office space for most 'office work based' firms. The real risk is from demand falling from cyclical recession... meaning firms cutting leases due to business declines and resulting layoffs. That's just a normal cycle, and we were overdue for one. Recovery would be hard to time, but hard to imagine where it doesn't happen. 

 
Aug 31, 2020 - 10:32am

What makes this hard to really predict is that there are two conflicting trends at play. WFH/virtual office which implies less need for space as one. De-densification and increased spacing which implies more need for space. Really, most of the moves in vacancy/subletting seem so far appear to be due to failing/contracting businesses, not due to either of these trends really impacting leasing decisions.

I think a lot of firms are really waiting to see what will happen, and many (like Facebook), are moving on with existing plans. 

I think all of the announcements regarding 'you can work from home forever or until XX date at least' are really just HR/PR/marketing stunts to keep workforce happy and get good press. I do not think they are actual results of workplace strategy or a real indication of many of these plans long-term plans to occupy office space. Those decisions will come later. 

 
Aug 31, 2020 - 9:10am

Surprised to not see a thread on this yet

There are multiple 

Commercial Real Estate Developer

 
Most Helpful
Aug 31, 2020 - 4:04pm

Major market (NYC, CHI, LA, SF) office space isn't going anywhere. Maybe some short term impact but corporations will still want their flashy 42nd floor NYC office to show off to clients. Good luck long term pitching to investors over buffered Zoom calls.

i think Suburban office will take a hit for sure though.

 
Sep 1, 2020 - 10:01am

100% agree with this take. Class A office in CBDs will be fine. B and C class office build in the 70's-90's will struggle, depending on market and location, but also will provide massive opportunities for repurpose/reinvestment/redevelopment. 

Commercial Real Estate Developer

 
  • Analyst 3+ in RE - Comm
Sep 2, 2020 - 1:59pm

I beg to differ on this. I think most companies that had existing space in those major markets will probably continue to maintain that space, but I'd expect it to be no bigger than what they previously had and in many cases, smaller than what it was before. Suburbs I could kind of expect to do somewhat decent. I think it really depends on where the workforce decides to live. NYC, SF and CHI are high densities of living within their proper city borders. Those who have been looking to buy a home outside of the city have actually made that leap, and many are considering WFH permanently, which can mean no limit on where you could actually live. Downtown locations will rise up again, it will be slow, but it does offer significant advantages due to transit and other immediate services available that are normally harder to come by in the suburbs.

 
Sep 2, 2020 - 10:03am

Currently have a substantial office acquisition tied up in a major market. Banks are incredibly competitive (with a deep bench of appetite) on the deal and this will be going into a very large fund of ours. Buying office at a great basis in markets that have great market dynamics still makes sense right now. 

Array
 
Sep 2, 2020 - 11:41am

Theme that I am hearing a lot is that this will further separate the winners from the losers. Recently constructed high-quality office buildings (mid-rise, large floorplates, good HVAC, operable windows, outdoor spaces/balconies, etc.) will thrive while older buildings (high-rise, small floorplate) will struggle. This is an acceleration of a prior trend, which seems to be the case with many of the covid-related impacts on our industry. 

 
Sep 30, 2020 - 6:10am

Full disclosure I don't work in office sector and have no idea what will happen in the future. But I do think there will be more changes to come for office. There was an article yesterday on the journal about VR technology being used to give employees a more "office" feeling. They can walk around in VR and see fellow employees just like in a real office setting. The technology is still developing and in its infancy but imagine its capabilities once covid is over. Even with stone-age technology like Zoom and Team, we can already get our shit done and even an old school shop that requires frequent facetime like my firm will likely switch to 2-3 day a week in office post covid. 
 

I like the idea Jane Jacobs once said, that cities are like living organisms. It lives, thrives, dies, reborn and repeat the cycle. Unfortunately, I think we are now in the "dies" era, just like when they invented highways and there was a suburbs flight that made inner cities ghetto as fuck. 
 

Im 100% for the idea of cities and the increased efficiency for businesses and operations when everyone is close to each other. But, IMHO, we're moving to the era of 2-3 days a week in the city for everyone. Imagine the changes to real estate if that happens. May be companies like Sonder and Airbnb will really take off and add a feature where people can sign several months long lease to stay at an apartment in the cities on specific nights of the week? Like coming into the city to work Monday to Wednesday and stay at the same apartment for 3 months and spend the rest of the time in their suburban homes? Who knows?! Personally, I like the idea of being in the city just 2-3 days a week, don't you?

Array

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