Office Space Isn’t Dead
By David Rosen, Residential and Commercial Real Estate Markets Advisor
On Friday, February 12th, Salesforce announced that it would continue to allow its employees to continue remote work after the COVID-19 pandemic ends. They join a growing list of companies such as Facebook, Twitter, and Square taking up similar policies that plan to allow remote work indefinitely. Does this mean that the COVID-19 pandemic will kill the office sector? At Hilgard Analytics, we argue it will not and we will tell you why.
Let’s start off with the case being made for the office sector’s decline. The COVID-19 pandemic has potentially started a long slump in the office sector that could last years until excess supply is absorbed or demolished. The largest reason for this belief is that that firms will choose to stay remote as they can reduce costs, both directly through reduced rents and indirectly through lower employee turnover and absenteeism. The savings were highlighted in an article, “Why Are Some Companies Moving Away from Telework?” by the SHRM. The SHRM estimated that there are 62 million potential telecommuters in the nation and that if each of them worked from home half-time, businesses would save $689 billion annually, $121 billion of this would be the decline in real estate costs alone. This is massive savings potentials, around $11,000 per employee.
While remote work sounds really good, especially during middle of a global pandemic, the idea for its proliferation has been discussed for many years and it has failed to take off in a sustainable way. For example, in 2017 IBM, a long-time leader in work-from-home, called most of its employees back to offices in an effort to boost creativity and relationship building amongst teams. This desire for companies to foster connections and creativity, especially in our creative economy, should continue to be a leading reason for companies to continue to lease office space. Additionally, companies that keep their office space may reverse the decades long trend of having less office space per person as more space may be needed to in an age where concerns over disease spread and the likelihood of future pandemics is up. According to data highlighted by Axios the amount of office space per worker has fallen from 260 to 214 square feet over the last 30 years. In many large cities it is even lower, 180 square feet per person, and under 100 square feet in many co-working offices. A reversal in this trend could soak up much of the office space needs that would disappear as a result of additional remote work being allowed.
Looking at the office market in California, the early data is generally indicating that the demand for office space will not be affected in the long-term. The numbers below, from CBRE, highlight the performance of office space relative to residential properties in the state. In Southern California, office properties have seen a rise of their CAP rate of around four-tenths of a percent while residential CAP rates have remained flat. However, according to reports by Newmark, rental rates for office space in the Greater LA region have continued to rise. In the Bay Area, where landlords were quicker to cut office rents from a high of $84.73/SF to $78.50/SF, CAP rates relative to residential property have actually fallen, indicating that landlords may think the bottom of the market has passed. In fact, current rents are roughly equivalent to what they were in 2018.
Hilgard Analytics believes that the office asset class will continue to have strong demand going forward because of the stated above increase in space demanded per worker and because in-person work is crucial in a competitive business environment that relies upon innovation and creativity. Additionally, markets where landlords have given some rent concessions, CAP rates have already been compressing, indicating the market sees a bottom and therefore the market can be expected to rebound much sooner than people have been saying.
About the Author
David Rosen, the Residential and Commercial Real Estate Markets Advisor, at Hilgard Analytics, has a proven track record of success in the real estate and automotive industries and currently works full-time at Mazda (North America) as a Senior Analyst in the CPO Repurchase Promotions Department. At Mazda, has has become a leader in terms of providing excellent customer service, advising management on various regulatory issues, and vehicle lifecycle management.
David is also the Founding Partner of a real estate investment company specializing in repositioning distressed assets in walkable communities that exist in America’s most underinvested in neighborhoods. He has a lifelong desire to make the cities we live in more equitable and prosperous and has the ability to generate unique insights from his background in data analytics and knowledge of architecture and urban planning.
He holds a Bachelor’s Degree in Finance from California State University, Fullerton and an MBA from the UCLA Anderson School of Management.
