(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
COVID-19 vs. the office sector
The COVID-19 pandemic has had a multitude of drastic effects on every sector of real estate.
One particular sector that isn’t discussed as much as others is the Office sector.
Just a few days ago Twitter announced they'll it plans to let all employees who wish to work from home do so for the foreseeable future, even after its offices reopen in a post-pandemic world.
It's yet to be seen how many other companies follow suit, but most people would agree that it's not looking promising for office real estate.
The convenience of remote working
Because of widespread stay-at-home orders, businesses are finally starting to realize the convenience and ease of working remotely, which would have been deemed as unproductive and overlooked by 99% of companies a few short months ago.
Virtually all businesses that didn’t embrace remote work pre-COVID-19 are now coming to terms with the indisputable fact that products such as Slack, Zoom, and Tandem make life 10X easier.
They’re falling in love with products that have been essential to many remote and non-remote teams for the past 5 years, because the very products that they previously shunned have finally become a necessity.
The effect on office properties
This shift in overall mindset and the increase in openness to explore new tools is optimal to the office sector not simply for the obvious reasons.
Now that tenants realize that they can be just as productive without having to spend tens of thousands of dollars per month on rent, it might be an expense that they’re willing to forego, especially as companies try to cut costs in light of the current circumstances.
For many companies, lowering overhead is, in fact, insisted upon by their investors—something we’ve been experiencing here at Lofty AI as well.
Because companies are being forced to cut costs, they’re realizing that allowing employees to work from home and eliminating rental costs is a much better strategy than continuing to pay rent and laying off important employees.
Working from home (WFH) was already picking up steam
The trend of working from home (WFH) has been gaining momentum for a few years now, especially as large companies like Salesforce and other industry leaders offer their employees the option to WFH.
When large companies like Salesforce adopt this approach, it forces their competitors to introduce the option to WFH in order to be able to compete for new employees.
For most people, if two companies are offering the same salary and benefits, but only one allows remote working three times a week, the choice is a no-brainer.
Why it makes sense to WFH
With the option to WFH, no longer do employees have to commute for hours every single day and attend meetings that could simply be condensed into emails.
Barbara Corcoran, founder of the Corcoran Group and an investor on Shark Tank states:
Demand for office properties will drop since companies have now practiced working from home and, in many cases, employees will prefer to skip the commute. With fewer on-site workers, companies will have more office space than they need and will aim to reduce their square footage. The people who have been working from home have realized they’re not so crazy about sitting in the traffic to go to work every day. Businesses are going to realize they have way too much space to utilize and they’re going to want to renegotiate their leases. And the landlords are going to have to deal with them.
How the office sector may be positively affected
This is unlikely, but the counter-argument to previous predictions about the demise of office spaces would be the new safety protocols that will require employees to maintain social distancing rules.
This could cause an even higher demand for office space to account for the space needed to achieve adequate social distancing. Companies renting office spaces with 3,000 sqft might need to expand to an office space with 4,000 sqft to account for the standard of six feet that must be kept between each employee.
These spaces would also contain more private areas and most likely move away from the open floor plan that has become wildly popular in office settings lately.
This seems unlikely, but it’s definitely possible.
The office sector has been severely affected by the pandemic, with many tenants barely able to pay rent. It’s yet to be seen how the sector will recover.
Many office building owners were relying on the co-working trend to boost and sustain their business, with companies like WeWork driving more and more millennials into their buildings, but co-working has taken a massive hit in the pandemic and may never even recover.
The future remains uncertain, but I think it’s safe to say that significant damages have been done.
The office sector sits in second place to retail in terms of real estate sectors that have been most affected by COVID-19.