From Office Workers to Landlords – Embracing Today’s Workplace Experience
Necessity spurs invention, and —while working from home was not invented because of the coronavirus— the pandemic did create an urgent need. Essentially overnight, most of the American office workforce left the boardroom for their bedroom, causing many employers to wonder how many workers might return to the office.
One consultant’s take on the workplace experience:
“Using a sample size of one, my perspective on working from home has been flipped on its head. 18 months ago, I would not have considered taking a job that was fully remote. Now, I am not sure I would consider an opportunity unless it offered a remote component. That said, my role currently involves working on a nationwide portfolio of real estate assets with people that are equally as spread across the country. Working from home makes sense for my role, but that is not the case for everybody.”
Spencer Ruberti, Director, Los Angeles
Emerging office worker expectations
Prior to the pandemic, the ability to work from home in any capacity was seen as a benefit, but the paradigm has shifted. Many employees now view remote work as an expectation, and employers may have to offer location flexibility to attract and retain top talent. This is evidenced by a recent poll which indicated that 58% of workers would look for new job if they could not continue to work from home. To some employers, this change will be viewed as a negative, but there is plenty of upside if companies are able to embrace this shift rather than fight it:
Spend smarter across staffing, technology, and spaces
One of the largest operating costs for a company is often its rented office space. This is especially true for properties in major cities. The savings achieved by downsizing physical space can be reallocated into avenues that drive growth rather than just eat away at the bottom line. For example, reinvesting the savings into technology can result in a more efficient workforce, or the money could be used to scale up operations by hiring additional employees.
Extra time equals fewer dollars
Time, in a sense, is money. For many employees, saving commuting time and benefitting from increased flexibility is worth a pay cut. This is exemplified by a recent study in which 64% of the respondents stated that they would choose a permanent work-from-home option over a $30,000 pay raise. The time that employees gain allows them to take care of their children, spend more time with family, and perform more housework. Therefore, embracing a hybrid model allows a path to achieving a best of both worlds for employers. By offering the freedom to work from home, companies can provide a benefit to employees while simultaneously reducing their overhead costs.
A wider pool of (perhaps more affordable) applicants
Previously, an employer’s talent pool was limited to the areas surrounding their physical office. This was especially true for smaller businesses that lacked a national footprint and, therefore, national reach. Now, any company can be nationwide, or even worldwide. This development is especially advantageous to employers seeking highly specialized skill sets that may not be available in their backyard. Additionally, many of these employees may be located in markets where there is a lower cost of living, which in turn allows employers to offer a lower salary. A recent example of this trade off can be observed at LinkedIn, which announced that most of its 16,000 employees will be allowed to permanently work from home full time. However, workers who relocate because of their newfound freedom might see their salaries adjusted based on their new local market. Facebook made a similar proclamation, with more organizations likely to follow suit. So, employees who dream of urban salary and rural cost of living may be out of luck.
Corporate culture, reimagined
Many will argue that corporate culture cannot be developed through a work-from-home model. Even the staunchest advocate of work from home must admit this is a major hurdle; that said, there are ways to combat this challenge. The pandemic greatly increased society’s comfort with video conferencing which can be an adequate substitute in many instances; however, there is still no replacement for face-to-face interaction. So, companies should be diligent about re-allocating a portion their rent savings towards sponsored, high impact social events to minimize the impact of lost interactions at the water cooler.
Additionally, organizations can send new and stronger signals by establishing more touch points. Companies should reach out to employees more often and be explicit about the purpose and meaning to create the culture that will retain its most valuable employees. They can host online events that prompt engagement with activities. One example of an innovative and inclusive approach is IBM, which offered self-organized signups through Slack for employees who wanted to connect with each other for social meetups or because they needed help from coworkers.
Additionally, remote work can help prevent physical harassment and bullying from occurring due to the nature of physical distance from the office. As a result, employees may have better mental health, which can also increase comfort and, in turn, production in their workplace.
The outlook for office owners
Office users are adapting to the needs of their workforce, which in turn means that the owners of office spaces will have to do the same for their tenants. The market is evolving quickly, but office space still has a place in this new world.
Amid this new environment what risk factors that are driving stability—or lack thereof?
The ways tenants actually use spaces today
For retail owners, the challenges faced by their tenant base during the pandemic was apparent from day one. As storefronts went dark, rent checks were replaced by requests for rent abatement. For office owners, on the other hand, the effects of the pandemic on their tenant base were much more difficult to grasp. In many cases, office spaces may be dark, but rents continued to be paid as operations were not severely impacted. So, for office landlords, it is imperative to understand what their tenants do when assessing retention risk. The likelihood of continued remote work, and thus downsizing office space, is heavily influenced by the tasks and activities performed in the office. For example, many software engineers primarily spend their days working individually, and when communication with coworkers is necessary, it can be effectively accomplished by way of phone, email, and videoconferencing. The same is true for other professions that focus on information gathering, processing, coding, and communicating data. As a result, such jobs are strong candidates for permanent work-from-home arrangements. Conversely, while telehealth is an option for the medical community, it provides a difficult environment to diagnose patients’ symptoms without physical interaction, which means that most doctors and nurses are obligated to perform some of their work in person. Therefore, remote work is higher in tech (73%), finance (67%), and media (59%). For landlords evaluating the strength of their rent rolls, it is very important to understand tenants’ industries and the specific nature of the work being performed within the space.
Location is (still) everything
At the onset of the pandemic, prices surged in the suburbs and rural areas as people fled the density of major metropolitan areas in favor of open spaces. Now, as the country has begun to open back up, demand is rising for urban properties, but there is still cause for concern. Office usage in major cities like New York City, Los Angeles, and San Francisco continue to be near historic lows. Meanwhile, the availability of sublease space is at an all-time high as companies have placed some (or all) of their space on the market to offset financial strains. This glut of space is likely to be exacerbated as companies that occupy significant space in major metro areas continue to provide their employees a permanent mobile option. Examples include Twitter, Square, Shopify, Coinbase, and Slack, with others expected. As office use secularly declines, lease rates and, in effect, building values will be negatively impacted across major cities.
Tabling tenant-related decisions
Lenders have largely used a “wait and see” approach when it comes to assets that have struggled in the wake of the pandemic. The equivalent for a landlord is the short-term renewal. With 70% of the United States white-collar workers still working remotely it is hard for companies to get a grasp on what their future office needs may be. Determining short-lived trends versus enduring changes—particularly as it relates to the needs of a specific company and work force—may take time. As a result, many tenants with near-term expirations will likely be inclined to use the same “wait and see” approach. Rather than abandon a space that suited them pre-pandemic or make a commitment beyond their comfort zone, tenants can lean on a work-from-home infrastructure that has already been utilized for the last year and a half. Therefore, the strike point for many renewals may include one or two years of additional term rather than five or 10 years. This is likely not music to an owner’s ears, but it sounds a lot better than trying to market vacant space in a tenant-friendly market.
Working from home by design, not by accident
Kitchens across the country have done an admirable job serving as makeshift offices during the pandemic, but likely are not long-term solutions. As a result, homes and apartments designed to accommodate working from home are now in demand, and, in response, home and apartment developers are starting to recognize the importance of office spaces in residences. For example, apartment buildings are carving out a built-in space for desks in studios and other units to attract those who work remotely. Furthermore, 14% of current apartment units are being reworked to better accommodate work-from-home needs, and developers are adding more outdoor space with balconies.
Co-living properties have also seen a surge in popularity, especially among people who live alone. At these assets shared common space was already the norm, but owners are now incorporating additional co-working space as an amenity. Examples include nooks and pods to provide individualized areas and high-speed internet.
Looking to the future
Physicist and researcher Niels Bohr once said, “Prediction is very difficult, especially if it’s about the future.” The truth is that nobody knows what the future of the office job looks like. Perhaps there will be backlash to the work-from-home model, and a return to the office happens faster or more comprehensively than business advisors might anticipate.
Or, are shifting work dynamics just the tip of the iceberg?
A portion of the current workforce has embraced remote work, but the future workforce may demand it. Baby Boomers and Gen X, who generally favor an office environment, are inching closer to retirement while Millennials and Gen Z, who generally have a higher comfort level with remote work, are advancing into decision making roles. Hence, the work from home shift could grow exponentially over time. So, while there are still more questions than answers, there is no debating that the pandemic has caused a seismic shift with a wide range of potential impacts. As the situation unfolds, stakeholders on each side of the ledger should remain as agile and adaptable as possible, knowing the only true constant is change.