Work from home has exploded since the pandemic began. It may seem temporary, but it may be the new normal. Here̵
Elliott Holt was always opposed to letting employees work from home.
“There’s no control over it,” says the CEO of a Nashville-based medical registry company. “We like to have control.”
With MediCopy growing at a rapid rate, its work-in-office ethos spelled a feverish expansion of its physical presence in Nashville. After adding a second office two years ago, the company was ready to hire a third last month.
But since the coronavirus pandemic has forced almost all of MediCopy’s 200 employees to work from home, Holt has had a sudden change of heart. He says he will allow employees to continue to telecommunicate in the long term, which will make him relinquish both additional offices, convert his headquarters into a training center and save $ 350,000 a year in leasing costs.
“Things work as they are,” he says.
When states lift home orders and gradually allow companies to reopen, companies deliberately allow white collar workers to return to office buildings even though they weigh how much they really need the space. About half of US employees worked from home during the COVID-19 shutdowns, according to the Brookings Institution. And many companies – including Facebook, Google, Twitter and Morgan Stanley – plan to continue to allow at least some employees to work at least part of the time even after a vaccine is available and the health crisis is over.
It could mean a $ 2.5 trillion seismic cut in the office market and the vibrant city centers that bloomed around them, and bump into restaurants, bars and high-end retailers relying on white-collar workers’ lunch and after-work.
“Genie is out of the bottle,” with many companies now including remote work, says Victor Calanog, director of commercial real estate economics at Moody’s Analytics. And if there is a major transition to telecommunications, “Do we really need that much office?”
Downtown, he says, can be spotted by shiny, murky office-building skeletons that resemble industrial relics in cities like Cleveland or Detroit or the growing crop of empty retail spaces in, yes, virtually any American city.
To be sure, analysts do not predict that US offices will be abandoned. In fact, more office space may be needed in the short term to meet social distance requirements until a coronavirus vaccine is widely distributed, probably next year. This can lead to more leasing and construction in cheaper suburbs. And in the long term, most companies will still probably want most workers in the office to promote collaboration and morale at least part of the time, some analysts say.
“I don’t see a situation where offices are dying completely,” says Paul Leonard, chief consultant at CoStar, a commercial real estate research firm.
But even a noticeable disadvantage in the US office footprint can have a significant impact on local economies, reduce city tax revenue, dampen office construction, increase commercial loan deficits (and thus damage banks) and threaten nearby restaurants and stores, Calanog and Mark say Zandi, chief economist for Moody’s Analytics.
Don’t expect any changes overnight. With contract terms averaging 6½ years, everything in the sector is likely to shrink over the next few years and beyond, says Leonard.
Offices stop during a crisis
In fact, office buildings weather the short-term effects of the health crisis much better than other commercial real estate just because insurance, finance and other professional officials can work from home – unlike restaurant, retail and manufacturers. Approximately 96% of office rents were collected in April and May, compared with a collection rate of 61% for shopping centers and about 30% for shopping centers, according to CoStar and NAREIM, a real estate investment trading group.
Although hotels, restaurants and shops have been hit hardest by the pandemic, professional and administrative services have known the ripple effects. About 4 million office jobs were rejected in the first and second quarters, according to Oxford Economics and CoStar. Some companies have closed permanently. And few companies sign new leases among record losses, the aftermath of the deepest recession ever and a pandemic that could still pose risks for office workers.
Calanog estimates the office vacancy rate – which never fully recovered after hitting 17.6% in 2010, just after the major recession – will rise from 16.8% at the end of last year to a record 19.4% in December. He expects vacancies to peak at 20.2% by the end of 2022. Historically, the rate has been about 10% on average, he says.
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As a result, Calanog expects office rents to fall 10.5% this year, with prices in major cities falling more sharply, including a 20.3% depth in New York City. Prices for the sale of office buildings are also expected to grow.
CoStar is more optimistic and forecasts that vacancies will begin to decline and rental growth will resume next year when the outbreak facilitates.
Richard Branch, chief economist for Dodge Data & Analytics, estimates office building will resume its pre-pandemic rate in 2021, but could subsequently hurt if large-scale telecommunications work continues.
Will the teleworking continue?
That’s the big question: How much of telecommunications development – which has up to half of the employees working from home most or all of the time – will be permanent and cause lasting damage to the office market. Before the pandemic, only 8.1% of workers spent one to five days a week on telecommunications, according to the Bureau of Labor Statistics and CoStar.
About three-quarters of Gartner’s finance executives surveyed at the end of March said they plan to permanently relocate at least some employees to the remote work after the pandemic, with 23% expecting to move at least one-fifth of their employees. And why not? A study from Stanford University in 2015 showed that it was significant productivity gains to let employees work from home four out of five days a week.
Holt, CEO of MediCopy, says his workers avoid hours of commuting and reduce stress. Business measures, he says, showed that they were both a little more productive and happier when working remotely during the second quarter. The $ 350,000 annual savings – from halving the company’s existing and planned Nashville office to 11,000 square feet – will be used to increase cybersecurity for home-based networks and profits.
Keith Roberts, president of Zenman, a Denver-based web design company, plans to go further and dig the ten employees of the company’s only office. The 1,000-square-foot space – reduced from 7,000 square feet late last year – sports an industrial look with exposed pipelines, Stars Wars Legos and a pinball machine.
“I always felt we had to have a really cool space” to impress both clients and job candidates, he says. He also thought, “You need the space to inspire creativity.” And he thought that content creators, web designers and software developers must be together to brainstorm ideas on a whiteboard.
But he says collaboration now works just as effectively online through video chats and other applications, without distracting the office.
“COVID has shown me that we can be more productive remotely with the tools and technologies available,” he says. “In retrospect, the pinball machine and cool space were more than a requirement to operate at the highest level.” Customers, he adds, have become more accepting of virtual companies without traditional physical space.
Even some call centers that rely on esprit de corps forged in group settings include the remote work.
Normally, the 127 representatives at St. Louis-based communication for research, which recruits people for surveys, benefits from listening to each other’s conversations, asking questions and being strong when they correlate recruits. But during the pandemic, almost everyone worked from home and held some of these activities through video meetings and group chats, says co-CEO Colson Steber.
“It definitely changed perceptions,” he says.
Now, he says, 52 rehearsals continue to work from home, and the company plans to merge its two call centers and close a 4,500-square-foot facility in Steelville, Missouri, by the end of the year. It saves about $ 3,000 a month in rents and related costs, says Steber.
Some prefer offices
Other companies are more reluctant to abandon their excavations. St. Louis-based Advocado, a consulting firm for advertisers and their agencies, had all 14 employees seamlessly switch to remote work during the crisis, says President Jeff Linihan. But, he says, staff missed the office’s camaraderie and offhand sparks of ideas.
After the pandemic disappears, he says, employees will work from home an average of one day a week, share workstations and postpone the need to rent new space as the company expands.
These types of benefits will prevent many companies from handing over office keys, says Leonard. In addition, he says, the attraction of urban business districts will not soon disappear.
“Industry clusters for high-skilled workforce and future talent migrate to these clusters for job opportunities” and the city’s amenities, says Leonard.
A spring survey by research company Gensler found that only 12% of American workers want to work full time from home.
In the end, Leonard argues that most companies will adopt a hybrid strategy that has employees working about 40% of the time.
Calanog, on the other hand, thinks many companies could switch mostly to sets for remote work. However, he and Leonard agree that less time in the office can leave about a quarter of the currently occupied office space vacant during the next five to ten years.
Such a development would jeopardize nearby eateries and shops. Frank Bonanno reopened nine of its 10 Denver restaurants in June when Colorado lifted restrictions and stopped floating with outdoor seating. But he recently closed French 75 again because it has no patio and drew little traffic in a financial district that has seen few workers return.
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Bonanno does not foresee that much improvement after the outbreak is over. “That revenue is gone,” he says.
He plans to host temporary pop-up events in the 3,000-square-foot restaurant, such as a corporate party, as long as the landlord lets him pay a fraction of his previous rent. But he will give up the place if the strategy is not profitable.
Bonanno says he understands the thinking of tenants in the area. He recently closed his restaurant business’s 4,000-square-foot administrative office and concluded the lease.
“We will never have an office that is so important again,” he says.
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