Last night, I interviewed 12 CEO’s in Orange County, CA. It was a group discussion that focused on what aspects of business are most likely to change once the coronavirus epidemic passes. Without hesitation, the first topic cited by these executives was the coming upheaval in the office space real estate market. To a person, everyone said that this prolonged episode proved that most people can clearly work well from home. They can be supervised effectively, and they are productive.
Why then, would a business leader want to maintain one of the highest cost items on their P&L? Prior to the pandemic, the answer would have been to maintain and foster a cooperative, team-oriented business culture. The conventional wisdom was that people need to see people and interact with their “business families” face-to-face, every day. The notion has been that this bonding creates loyalty to the company as well as productive relationships with each other.
Our group of executives have now seen this assertion directly refuted by the remote work practices undertaken in the pandemic. Zoom meetings, Microsoft Teams, Slack, continuous chat and even always-on video windows have replaced “management by walking around” as the norm of business behavior.
“And it works so well”, said one of the CEO’s interviewed, “that most workers actually prefer it to having to interact face-to-face.”. Ironically, he said, only the millennials, who do not have a long history of working in a face-to-face culture, find themselves missing the social interaction in the workplace. However, they are adapting by creating virtual interactions with each other outside of work, through virtual cocktail parties and video sharing.
For all of the CEO’s shedding office space will be a high priority once things get back to normal (whatever THAT is). The economic impact could be significant. Major commercial real estate broker CBRE had projected modest growth in 2020 for office space. Technology companies and professional services firms comprise a significant portion of that growth. These are the types of companies that are most likely to be able to take advantage of smaller office footprints.
The typical employee takes up 125 and 225 usable square feet of space in an office. If we assume that 30 million people work in offices today in the United States, (roughly 20% of total employees) that translates into about 4 billion square feet. Just imagine the impact on the economy if 20 percent of those workers started working from home and their companies shed their office space. 800 million square feet of space would become vacant. Office costs vary greatly across the United States, but if we assume that the highest cost offices would be the first to be downsized, it would be reasonable to use a rental cost of $30 per year. That translates into $24 billion in lower office rents in the U.S. on an annual basis. If half the office workers went virtual, it would come to $60 billion in lost rents per year.
According to IBIS World, the total U.S. commercial real estate market (including retail space) is $1.2 trillion per year. Therefore, the remote work trend could deliver a blow of between 2% and 5% to total industry revenues. Compare this to an industry that has been growing over the past decade, and it does not constitute good news for landlords or investors. Add in an equally dismal outlook for retail commercial space and a residential sector hit by virus-induced poverty and it does not look positive for real estate as an asset class.
This piece first appeared on New Geography.
Marshall Toplansky is Clinical Assistant Professor of Management Science at Chapman University. He is co-principal investigator, with Joel Kotkin on “The Orange County Model”, a demographic and econometric research project to identify growth strategies for that region. He is formerly Managing Director of KPMG’s national center of excellence in data and analytics, and is co-founder of Wise Window, a pioneer in sentiment analysis and the use of big data for predictive models. He lives in Orange, California.