The future of office real estate

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


 

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.

 

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. 

 

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.

 

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.

 

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.  

 
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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. 

 

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. 

 

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
 

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.

 

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. 

 

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
 

Pretty interesting view points here. No is saying that NYC, LDN, SF, PAR etc will die over night. However, certainly feels like there is a bit of change to come.

At least here in EMEA, the face-time element is not that high. My VPs have already indicated that unless there is a client meeting, they are OK working from home and would like to explore the option of WFH 2-3 days per week. Expect similar opinions for most senior ish people (i.e. senior associates etc who are not mulling exit opps/job changes/early promotions on a regular basis).

If for one second we stop focusing on hardcore IBD and gradually start branching out starting from departments like Tech, Ops etc... can easily see WFH catching on 2-3 days at least. Then think about other industries, F500 firms etc, where face-time is not as paramount. Don’t think your CorpDev managers, Marketing staff etc at say P&G or Microsoft are going to be so uptight about coming in to the office. Slightly larger homes in suburbs from where one can commute in 2 days per week might make sense.

At the same time, I feel like this is an idea that is starting to take shape just now as people are starting to fine tune their working patterns having tried it for 6 months. As time goes on, say around mid-2021, if we are still mostly WFH, then I genuinely doubt firms will remain silent; expect them to make a move around that point. Expect more firms to come out around Q1/Q2 2021 to say what they anticipate.

 

Interesting to see everyone's opinion on this. It is certainly an interesting dilemma as this pandemic provided that the WFH model is possible. Personally, I see a model with companies (aside from F50 companies) having small flex offices around the country rather than 2 or 3 big headquarters. We have seen companies like Amazon and Apple doubling down on office space during the pandemic however when I personally think companies like those would pioneer the wfh model. There is value in having a collaborative environment that an office provides, especially at more junior levels. At the end of the day, it is management's decision, so it really comes down to whether they choose the more cost-effective option or the more, for lack of a better term, convenient option. It comes down to how much value you see the office really providing. Personally, as someone just starting out my career, I prefer the office, as I get to network and meet other people, as well as live in a big city, albeit timing is not ideal for the latter. 

 

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