With 2020 ending we can now begin to consider what will likely happen in 2021, hopefully a year when the pandemic will end and some sense of normality will begin to return.
There is no doubt that 2020 will be remembered as an exceptional year for residential real estate. October home prices were up 15.5% when compared with a year earlier according to the National Association of Realtors (NAR) while 30-year mortgage rates slipped below 3% for the first time.
“The story with commercial real estate is different,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real-estate data. “Just ask yourself: When was the last time you slept at a hotel, shopped in a mall, attended a sports event, went to see a movie, or commuted to the office? For many Americans, the answer since March has been pretty much never.”
NAREIT – the National Association of Real Estate Investment Trusts – estimated that the 2018 total dollar value of commercial real estate was as much as $17 trillion. This projection included a variety of properties such as retail outlets, industrial space, and hotels. The office segment had an estimated value of $2.5 trillion.
Commercial office properties represent a big part of the tax base in many metro areas, not just as bricks and mortar but as a place where millions of people earn their income and buy from local businesses. The pandemic, however, has raised difficult questions: What is the value of a commercial building when most traditional office occupants suddenly work from home? What about nearby stores, malls, warehouses, and hotels? We don’t yet know, but several factors mean the old ways of doing business are in flux and in some cases perhaps gone. For investors, the notion that change equals opportunity means there may be new opportunities with commercial property.
The necessity of office structures is no longer so certain
“Employers,” according to The New York Times, “have discovered that productivity does not necessarily suffer in the absence of shared work space and that smaller office footprints and more lenient work-from-home policies might make lasting economic sense.”
For years people have successfully worked from remote locations but the concept has been largely resisted by employers. It has long been argued that if employees work remotely they cannot be effectively managed, that they will be less productive. That view is now being tested. For example, the Partnership for New York City says just 10% of Manhattan office workers had returned to work by late October and yet businesses continued to function. In fact, it may be that working from home is actually more productive for many workers.
A December study from the University of Chicago found that “high-income workers, especially, will enjoy the perks of working from home” and says that productivity might rise by as much as 2.4%. In addition, with fewer workers in traditional office settings, it estimates that “the post-pandemic shift to working from home will lower worker spending in major city centers by 5 to 10%.”
While increased productivity is a plus, less worker spending means reduced revenue for office center businesses, a downside that can impact property values and rental rates.
Technology has changed the ballgame
According to the Pew Research Center, “most workers who say their job responsibilities can mainly be done from home say that, before the pandemic, they rarely or never teleworked. Only one-in-five say they worked from home all or most of the time. Now, 71% of those workers are doing their job from home all or most of the time. And more than half say, given a choice, they would want to keep working from home even after the pandemic.”
Systems such as Zoom and Google Meet allow workers to work together in real time. Consider the number of national conventions that went virtual for the first time this year. Suddenly the cost for air fares, hotel expenses, exhibit space, meals, and cabs were gone.
“More than 20% of the workforce could work remotely three to five days a week as effectively as they could if working from an office,” explains a recent report from McKinsey & Company. “If remote work took hold at that level, that would mean three to four times as many people working from home than before the pandemic and would have a profound impact on urban economies, transportation, and consumer spending, among other things.”
Maybe 20% is an understatement. In early April, as one example, CNBC reported that 98% of all Goldman Sachs employees were working remotely.
Employers will be forced to offer work-at-home options
Employers will always fight for the best employees and those employees increasingly will want to work from home. In the same way that employers offer packages with health insurance, retirement, and vacations the opportunity to work from home will be added to the mix.
Another study released this year by the University of Chicago estimates that “37 percent of jobs in the United States can be performed entirely at home, with significant variation across cities and industries. These jobs typically pay more than jobs that cannot be done at home and account for 46 percent of all US wages.”
You can see where this is going.
First, fewer people will be working in traditional office settings once the pandemic ends. With the ease of Internet connections, a growing number of workers will truly be distant employees, moving from metro cities to suburbs, smaller cities, vacation centers, and rural locations sometimes hundreds and even thousands of miles away from downtown office centers. It will be much easier to earn a Manhattan or San Francisco salary from a location by the beach or in the mountains.
Second, with fewer office workers there will be less commuting and less pollution. Those who continue to work downtown will spend less time in transit.
Third, companies will better learn how to manage distributed employees. Expect big debates regarding worker privacy, compensation, and how to measure productivity.
Fourth, commercial office space will not disappear. We are likely to see more square footage per employee, making office environments more attractive. Developers will continue to build office space, especially at the upper end.
But what about older office buildings with great locations? Don’t be surprised if zoning evolves and that many of today’s older commercial real estate properties become residential condominiums in the best shopping, dining, and entertainment areas in town.
In the end neither cities nor massive office projects will disappear because of the pandemic. The 1906 San Francisco earthquake caused a massive fire that leveled almost 500 city blocks and yet the city was rebuilt. The 9/11 attack destroyed property and commerce worth billions of dollars in Lower Manhattan and yet the One World Trade Center – a building reaching 1,776 feet high – now stands in place of the lost Twin Towers. While 2020 is the year of the pandemic a new $2.3 billion Manhattan office tower was announced in November.
Big office centers will be back. Employers are not going to give up the benefits of big-city density and the productivity of centralized locations. Neither are large numbers of workers, especially those starting a career and seeking jobs, benefits, and nice places to socialize after a day at the office.