After Pandemic, Will the Need for Office Space Shrink as More Companies Move to Remote Work?

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Dear Commons Community,

As more people get vaccinated and there is hope that the worst of the pandemic is behind us, there is interest in what the world of work will look like.  Will working remotely become the norm or will offices in major metropolitan areas such as New York and San Francisco once again teem with employees. The New York Times has an article this morning reporting that some big employers are giving up square footage as they move to remote work.  The article’s conclusion is  that this could devastate commercial building owners and cities.   Here is an excerpt.

“As office vacancies climb to their highest levels in decades with businesses giving up office space and embracing remote work, the real estate industry in many American cities faces a potentially grave threat.

Businesses have discovered during the pandemic that they can function with nearly all of their workers out of the office, an arrangement many intend to continue in some form. That could wallop the big property companies that build and own office buildings — and lead to a sharp pullback in construction, steep drops in office rents, fewer people frequenting restaurants and stores, and potentially perilous declines in the tax revenue of city governments and school districts.

In only a year, the market value of office towers in Manhattan, home to the country’s two largest central business districts, has plummeted 25 percent, according to city projections released on Wednesday, contributing to an estimated $1 billion drop-off in property tax revenue.

JPMorgan Chase, Ford Motor, Salesforce, Target and more are giving up expensive office space, and others are considering doing so. Jamie Dimon, chief executive of JPMorgan Chase, the largest private-sector employer in New York City, wrote in a letter to shareholders this week that remote work would “significantly reduce our need for real estate.” For every 100 employees, he said, his bank “may need seats for only 60 on average.”

And just as Coca-Cola’s profits would take a seismic hit if consumers abruptly cut back on sodas, owners of office buildings, many of which are owned by pension funds, insurance companies, individuals and other investors, could be pummeled if many businesses rent less space.

“The pandemic has proven that work from home is viable,” said Jonathan Litt, chief investment officer of Land & Buildings, a real estate investment firm that has taken a bearish view of the New York office market. “It’s not going away; businesses are going to adjust, and office real estate is going to take it on the chin during that adjustment period.”

Across the country, the vacancy rate for office buildings in city centers has steadily climbed over the past year to reach 16.4 percent, according to Cushman & Wakefield, the highest in about a decade. That number could climb further, even as vaccinations allow some people to go back to work, if companies keep giving up office space because of hybrid or fully remote work.

So far, landlords like Boston Properties and SL Green have not suffered huge financial losses, having survived the past year by collecting rent from tenants locked into long leases — the average contract for office space runs about seven years.

But as leases slowly come up for renewal, property owners could be left with scores of empty floors. At the same time, many new office buildings are under construction — 124 million square feet nationwide, or enough for roughly 700,000 workers. Those changes could drive down rents, which were touching new highs before the pandemic. And rents help determine assessments that are the basis for property tax bills.

Many big employers have already given notice to the owners of some prestigious buildings that they are leaving when their leases end. United Airlines is giving up some 150,000 square feet, or over 17 percent of its space, at Willis Tower in Chicago, the third-tallest building in the country and a prized possession of Blackstone, the Wall Street firm. Salesforce is subletting half its space, equivalent to roughly 225,000 square feet, at 350 Mission Street, a San Francisco tower designed by Skidmore, Owings & Merrill and owned by Kilroy Realty.

Roughly 17.3 percent of office space in Manhattan is available for lease, the most in at least three decades. Asking rents have dropped to just over $74 a square foot, from nearly $82 at the beginning of 2020, according to the real estate services company Newmark. Elsewhere, asking rents are largely flat from a year ago, including in Boston and Houston, but have climbed slightly in Chicago.

The Japanese clothing brand Uniqlo, whose United States headquarters are in Manhattan’s SoHo neighborhood, recently moved to another building nearby, an open layout with tables designed for 130 people who will go into the office only a few days a week. Many of its office workers will keep working remotely, while some employees, like those in marketing, will occasionally meet in SoHo.

“As a leader, it has been challenging because meeting people face to face is so important,” said Daisuke Tsukagoshi, the chief executive of Uniqlo USA. “However, since we are a Japanese company with global reach, the need for remote collaboration among many centers has always been part of our culture.”

The stock prices of the big landlords, which are often structured as real estate investment trusts that pass almost all of their profit to investors, trade well below their previous highs, even as the wider stock market and some companies in other industries that were hit hard by the pandemic, like airlines and hotels, have hit new highs. Shares of Boston Properties, one of the largest office landlords, are down 29 percent from the prepandemic high. SL Green, a major New York landlord, is 26 percent lower.

Fitch Ratings estimated that office landlords’ profits would fall 15 percent if companies allowed workers to be at home just one and a half days a week on average. Three days at home could slash income by 30 percent.

Real estate executives claim not to be worried. They said working from home would fade once most people were vaccinated. Their reasons to think this? They say many corporate executives have told them that it is hard to effectively collaborate or train young workers when people are not together.

These landlords also contend that the properties they own — known in industry jargon as “class A” buildings — will hold up much better than more pedestrian offices or hotel and retail buildings.

“We believe differentiated office product like Willis Tower will continue to attract quality tenants, and that buildings that have invested in amenities, services and technology will be well positioned moving forward,” Nadeem Meghji, head of real estate for the Americas at Blackstone, said in a statement.

Landlords also said that even if employees didn’t go in daily, they would want designated desks and cubicles that were socially distanced.

Some companies are eager to get people back into offices. Tech companies, including Amazon, Facebook, Google and Apple, have added office space in New York City during the pandemic, and some are also expanding elsewhere. Last week, Amazon told employees that it would “return to an office-centric culture as our baseline.”

Remote work and its impact on cities like New York will be a major development over the next several years. 

Tony

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