Is Work-From-Home Killing Commercial Real Estate?
Occasional remote work was part of the routine for many workers long before March 2020. However, the pandemic ensured that stay-at-home policies turned Zoom conferences and telecommuting into the norm.
Although the COVID-19 infection rate shows signs of slowing, many employees are not back to working on-site full-time — and have no intention of doing so just yet.
This unconventional work trend has deeply shaken commercial real estate, particularly large office buildings, which are now under-occupied.
The high vacancy rate is not necessarily bad news, as it gives investors the chance to provide workplaces more suited to the current needs of both workers and companies.
Remote work is here to stay
Telecommuting was already popular with many organizations and their personnel long before the coronavirus pandemic.
According to a Regus study from 2017, 54% of employees worldwide were already spending half of the week working somewhere other than their company’s primary location — be it from home, a satellite location, or a client’s office. This transition to remote work developed organically and became a practical evolution of working.
Now, high-speed internet and advances in technology make it easier than ever to work remotely. For instance, the number of planning tools (including Trello or Slack), online meeting apps (such as Zoom), and file-sharing services (Google Drive, Dropbox, to name a few) have exploded in the past year.
Teams can now communicate and manage projects seamlessly no matter their location. Besides, Millennial and Generation Z workers continue to demand a better work-life balance, so rigid work schedules are a major red flag for these younger groups.
In recent Limeade research, 71% of respondents indicated they are anxious about returning to their workplaces because they fear losing the flexibility that came with the hybrid or work-from-home model they adopted during the pandemic.
Also, in the wake of the pandemic, workers have moved from metropolises such as New York, Chicago, San Francisco, and Los Angeles to mid-sized cities and suburbs with more space and lower real estate prices.
But their relocation is not entirely voluntary. As their presence in the office is not required every day, they also need access to a dedicated — but more importantly — affordable home office space outside the pricey urban center.
These lifestyle and demographic changes have serious consequences for commercial real estate.
Some commercial real estate assets may become obsolete
Large single-occupant office buildings, where each worker had access to their assigned cubicle, were once a sign of prestige. But companies’ recent decision to adopt the hybrid model — i.e., employees working from home part-time — has dramatically reduced the occupancy levels of these properties and left large office spaces underutilized.
As a result of the diminished need and demand for space, corporate tenants are calling for more flexibility and concessions from landlords to make these workspaces viable.
Instead of identical cubicles, today’s office workers need access to informal collaborative spaces and private areas where they can focus on the task at hand without interruption.
Business owners seek these accommodations from landlords because the statistics generated during the pandemic demonstrate that there is still a need for conventional offices.
While most workers would prefer to work from home at least two days a week, over 20% don’t see themselves working remotely. Further, 27% of remote workers reported that they regretted not being able to unplug at the end of the workday.
Teamwork and collaboration also suffered from workers’ isolation and lack of in-person interactions, with 16% of respondents reporting these issues as their biggest struggle with working from home.
Simply put, the office isn’t going away. And as the unemployment rate falls, office demand will rise.
New opportunities for investors
Commercial real estate must adapt to new lifestyle trends to thrive. Accordingly, we need to develop an offering that satisfies the needs of corporations and employees alike. Although traditional single-occupancy office building owners are facing challenges, the remote working trend offers new opportunities.
Investors should consider diversifying their portfolios to include smaller offices in locations closer to where employees live.
Corporations also need shorter leases that provide more flexibility. Unlike multi-year commitments, shorter terms (monthly, weekly, or even hourly) allow established companies, along with freelancers and startups, to share the same building and maximize its occupancy.
There is similarly a lucrative opening in coworking spaces — many home-fatigued remote workers are looking for alternatives. Additionally, remote work–friendly features are in growing demand in new condos and apartment communities.
Given these latest real estate dynamics, investors should consider converting existing assets to creative uses to attract new tenants. In some areas, empty offices may be replaced by mixed-use buildings featuring housing and coworking spaces.
Elsewhere, new opportunities are taking more dramatic forms, such as repurposing large spaces for last-mile industrial uses to feed the immense demand for online retail distribution.
The office will live
For many organizations, the pandemic triggered a prompt switch to a remote or hybrid model. Yet, work-from-home isn’t killing commercial real estate.
The immediate deployment of digital technologies kept businesses going. And now that the tools of quality telecommuting have been acquired, it’s time to look forward. Commercial real estate needs to adapt to take advantage of the opportunities this out-of-desk work approach provides.