It was only a few months ago that cities were worried about how to keep their low-income residents. Now there’s concern that the need for social distancing is chasing big companies and their highly-paid employees away. The post-pandemic office environment is going to be different, and there are signs already that businesses are rethinking their office space needs.
CNBC published an article called, “After flocking downtown to woo millennials, offices might be moving back to the suburbs.” (1) The article quoted data from real estate firm JLL that shows office leasing volume in Manhattan dropped 47% during the first quarter compared to a 10-year average. And, the founder of hedge fund Land & Buildings Investment Management is predicting an “existential hurricane” for the New York office market.
New York “Existential Hurricane”
Land & Buildings’ Jonathan Litt said in a statement, the hurricane started to form when Congress approved a cap on the state and local income tax deduction as part of the Tax Cuts and Jobs Act of 2017. That made New York less competitive because property values were so high and people could no longer take a full deduction. He says, the hurricane turned into a Category 5 when New York became the epicenter of the U.S. COVID-19 outbreak, and that Empire State Realty Trust “is poised to bear the full brunt of the storm” because of the economic shutdown that’s impacting commercial tenants.
But it isn’t just one big retail landlord who will suffer. Litt believes that office vacancy rates in New York City will rise above 20% in 2020. CNBC cites data from Moody’s Analytics which also sees a 20% vacancy rate by next year, and office rents that are down about 25%. WeWork office space could be among those that see reduced demand because of the need for social distancing. If you are a remote worker, you don’t need a shared office space. It’s optional, and staying at home right now is safer. Litt says, co-working space amounts to about 4% of the office space market in New York City. He sees a 3% drop in that number in the near term.
Sharp Rise in Remote Work
Those numbers alone may not be a convincing argument for a substantial move away from the city, but combined with a sharp rise in remote work, many employees won’t need to live and work in the city. They will be able to live anywhere. And some companies have already made remote work a permanent option for employees. Twitter is one of them. Just a few weeks ago, Twitter told employees that they can work from home “forever” if they want to. So they will have a choice, making the city office environment less important, and possibly less of an urban footprint.
The remote work revolution began a few months ago when Twitter, Microsoft, Google, Amazon, and other tech companies told employees to work from their homes. At the time, Twitter’s Jennifer Christie told BuzzFeed news that the company would “probably never be the same” in how it structures its work environment. (2) She said that, “People who were (reluctant) to work remotely will find that they really thrive that way.” She included managers in that statement and said, “I do think we won’t go back.”
The Future of Work as Remote, Suburban
For those that do return to an office, they are likely to see fewer colleagues, staggered work hours that might include alternate days and/or shifts combined with work-at-home hours, and more spacious seating arrangements in the office.
Companies may coordinate shifts to avoid peak commuter hours as well, since driving to work will be more desirable than public transportation. There will also be a major shift from the idea that it’s okay to come to work while you are sick, to one where you stay at home until you are not contagious.
Albert De Plazaola, from design firm Unispace, told BBC that we won’t see any major retrofits yet, since the dust is still settling on the pandemic. He says, “There’s a flurry of activity, but it’s purely focused on tactical solutions. No one is willing to invest a significant sum on solutions that could be rendered ineffective in six-months’ time.”
He sees a renewed emphasis on workstations or cubicles that were more recently exchanged for an open office environment. Sneeze and cough barriers will be important. De Plazaola says, right now, organizations are trying to determine who needs to be physically present and are capping their in-office personnel at about 30%. Other features that could make the office environment safer including apps on your smartphone that control push-button devices, voice-activated lights and audio/visual equipment, and UVC purification of the air as it travels through the ductwork.
As for the future housing, most experts see a surge in the desire for suburban homes, both rented and owner-occupied. Employees who can work remotely, will be able to move away from the city to more affordable housing in the suburbs. Plus, workers won’t have to commute, take public transportation, ride in elevators, or cart their kids off to daycare. They may even get subsidies for their home work space. Suburban office space will also provide at least some of those benefits.
There are many changes ahead for the way that we work with each other and where we do our work. It looks like COVID-19 may level the playing field a bit for the old real estate phrase “location, location, location.” If you are a real estate investor, be on the lookout for new markets that post-pandemic employees will want to call home. We can help you with that. It’s free to join ReaWealth and free to access our research on where to invest.
(1) CNBC Article
(2) BuzzFeed: Working From Home