A survey conducted this past summer — just one of many recent and sometimes conflicting studies that have attempted to pilot companies through the fog surrounding the office sector — suggests that white-collar workers are quite happy working from home. The July 2021 survey of 1,000 U.S. workers by insurance company Breeze reported that the majority would take less money and reduced benefits to work for companies with full-time remote-work options.
Many companies appear to be willing to accommodate these desires. In a survey released this past March by consulting firm Vocon of 103 U.S. corporate executives from a wide range of industries, 66% expected to adopt a hybrid model that enables their workers to spend at least part of the week at home.
Assuming that many people will continue working remotely after COVID-19 has dissipated, what does this mean for the office sector? With the delta variant of the virus posing an ongoing threat and companies evaluating their options earlier this year, experts say that nobody can be completely sure. Alan L. Pontius, who heads up Marcus & Millichap’s national office division, told Scotsman Guide in August that while a flexible working model may well become normal, he doubts that it will reduce demand for office space.
Others, however, say that certain office assets could face a long-term problem — particularly those properties located in downtown areas of expensive cities, such as San Francisco and New York. An ominous sign that these markets could face a rocky future is that many office workers have already moved outside of easily commutable distances from these city centers.
In a third-quarter 2021 report, advertising-technology platform Audience Town estimated that nearly 14 million Americans were likely to move within the next six months. Ed Carey, the company’s founder and CEO, says that a significant number of these people will move outside of expensive cities because they have the freedom to work from home.
“The assumption has to be that people are relocating with the expectation that they will commute less or they will commute farther,” Carey says. “So, here in New York, what that might mean is people moving to eastern Pennsylvania instead of Bergen County, New Jersey, or something like that. What that means is, instead of an hour commute, it becomes a three-hour drive once a week or once a month to be in the office.”
Carey says he has firsthand knowledge of the pandemic’s impact on the office sector in New York City as his company searched for office space in the Big Apple this past year. Landlords are aggressively lowering prices, accepting month-to-month arrangements or agreeing to short-term leases of less than a year.
“Five years ago, a lot of these commercial (real estate) brokers would require a five- to 10-year lease,” Carey says. “Right now, we’re getting totally negotiable lease terms. They’re hoping to get you for at least a year and the price is 25% to 50% lower than it was pre-COVID.”
Clelia Warburg Peters, a venture partner at Bain Capital Ventures, says it’s not yet clear how office trends will shake out. She suspects, however, that property values will ultimately depend on the same basic factors as in pre-pandemic days — including asset quality, tenant mix and location.
Also, Peters notes that a mixed-message story is playing out in regard to the impact of remote working. Companies that have announced flexible work policies tend to be large tech firms, but these employers also are adding to their office footprints in some cities. In August 2020, for example, Facebook agreed to lease all of the 730,000-square-foot James A. Farley Building in midtown Manhattan, The New York Times reported. With this agreement, Facebook had acquired more than 2.2 million square feet of office space on Manhattan’s West Side in less than a year.
“People are maybe going to be somewhat hesitant to sign large multiyear leases,” Peters says, “though by the same token, even as players like Facebook or Google announced their more flexible policies during the past year, they’ve also taken on meaningfully expanded leases in New York City. I do not think that this is the death knell for office space.”
Matthew Argersinger, the lead investor in real estate investment service Millionacres, says that office markets in large gateway cities are suffering. He doubts that key fundamentals will bounce back to pre-pandemic performance levels for some time, but certain regional office markets are a different story altogether.
“If you look at Nashville, Amazon is trying to have 5,000 more jobs there,” Argersinger says. “Oracle is opening up a new place there and they don’t have enough office space right now. You can expect in those places, in certain pockets, the demand for office is going to be really high. So, it almost goes back to the way it was before the pandemic, which is, it’s always regional. It always depends on who’s hiring and where people are moving.” ●
