If Remote Working is Here To Stay, What Does That Mean For Landlords?

For those still not sold on the work-from-home revolution, consider this: A survey conducted found that productivity in call centres increased 7.6% after a switch to remote working with no discernible decrease in customer satisfaction. In fact, even workers initially opposed to the idea are steadily coming around—workers surveyed indicated that they would like 28% of their hours to be worked remotely, a decided jump from 20% a year prior. Before the pandemic, less than 5% of workers were considered remote; in 2022, 15% of workers expect to be fully remote and just under a third desire a hybrid situation, with 15% indicating they would leave an employer not offering remote opportunities. 

In the aftermath of the pandemic, it looks like remote working is here to stay and commercial landlords will need to adjust. 

Premium Space Reigns Supreme

As we discussed in a previous blog post, not all office space is experiencing high vacancy rates; premium office space is being sought after by companies anxious to entice their employees back with flashy offices and one-of-a-kind amenities. In New York, over half of commercial tours are for Grade A office space, whereas before the pandemic premium space only accounted for 38% of tours. 

Double Trouble for Non-Premium Spaces

In addition to lack of demand, owners of non-premium office spaces have another issue to contend with: The ‘greening’ of office space. 

Globally, the energy used to light, heat, or cool buildings contributes over one-third of greenhouse gases; in New York, 71% of greenhouse emissions come from buildings. Governments have begun to put policies in place that will limit the amount of pollution buildings can produce. In England and Wales, one in 10 buildings will be considered ‘obsolete’ by the end of 2022 and more than half by 2027, due to new regulations.

Owners of non-premium office space seem to be faced with some very expensive options. In order to bring older buildings up to environmental snuff and be fancy enough to attract tenants will require substantial investment; however, leaving buildings vacant brings its own financial costs. Even selling may not be a viable option as the IMF predicts that a 5% rise in vacancy rates would cause a 15% decline in valuations in the next 5 years—that 15% rises to half if workers don’t commute at least three days per week.

What is a commercial landlord to do? Much like horse-and-buggy manufacturers and fax machine companies, they will need to adapt to changing times.

Options for Landlords

Since the pandemic began, more than 103 million square feet of office space has been vacated—18% more than during the 2007-2009 financial crisis. But where old opportunities are disappearing, new ones are appearing.

We spoke in a previous blog post of the incredible demand for lab and research space as well as warehousing and distribution. In addition, many unused office towers are now being converted into apartments to provide supply in an overheated residential market—151 buildings were converted in the US alone in 2021. 

It is not all doom and gloom for commercial office space landlords. From the ashes of the pandemic have risen several opportunities that could provide bright futures for landlords. 

It’s also important to keep in mind that very important powers have a vested interest in seeing the commercial office sector survive. For starters, American banks have lent $2.4 trillion (with a ‘t’!) to commercial property since the pandemic; you can be sure they will do whatever is in their power to ensure that’s a sound bet. Additionally, some of the biggest investors in office space happen to be institutional—pension funds and insurers. Pre-pandemic, these institutions made big moves into commercial property as they couldn’t achieve the necessary return on investment anywhere else and in 2019, commercial property was nothing short of a sure bet. It’s highly unlikely that any western government will allow a pension fund or insurer to sink, and reasonable to expect government policies designed to help office landlords in the coming months and years. 

The Office of the Future

Canadians are dining again, flying again, and visiting sporting events—what they aren’t doing is returning to the office. Whether this becomes a long-term trend remains to be seen, but prudent landlords can start making changes right now that will make their buildings future-ready, such as making them ‘greener’ and adding amenities. 

Keep in mind that there’s a reason people prefer face-to-face meetings and that those with the closest relationship to the boss get promoted—human relationships matter, and as anyone who has had to communicate with a loved one overseas knows, video just isn’t the same. 

There are tens of thousands of businesses that were built specifically to serve the skilled workers in office buildings including food courts, dry cleaners, and office supply stores. It is the unskilled workers employed by these businesses that are experiencing the brunt of the pandemic, and in addition to powerful allies in pension funds and insurers, you can be sure these workers are hoping for a return to business as usual as well. 

If you’re a landlord with questions about how best to position your office space for a maximum return on investment, contact the experienced team at MCRE for expert advice!

REFERENCES

• Someone has to foot the bill for empty offices. (2021, June 5). The Economist. Retrieved February 25, 2022, from https://www.economist.com/leaders/2021/06/05/someone-has-to-foot-the-bill-for-empty-offices. 

• What a work-from-home revolution means for commercial property. (2021, June 5). The Economist. Retrieved February 25, 2022, from https://www.economist.com/finance-and-economics/2021/06/03/what-a-work-from-home-revolution-means-for-commercial-property. 

• Commercial property's biggest challenge is not the pandemic. (2021, November 8). The Economist. Retrieved February 25, 2022, from https://www.economist.com/the-world-ahead/2021/11/08/commercial-propertys-biggest-challenge-is-not-the-pandemic. 

• Underused Office Buildings Get New Life as Deluxe Apartments. (2022, January 6). Wall Street Journal. Retrieved February 25, 2022, from https://www.wsj.com/articles/underused-office-buildings-get-new-life-as-deluxe-apartments-11641301203. 

• Will remote work stick after the pandemic? (2022, January 15). The Economist. Retrieved February 25, 2022, from https://www.economist.com/finance-and-economics/2022/01/15/will-remote-work-stick-after-the-pandemic. 

• People Are Going Out Again, but Not to the Office. (2022, February 14). Wall Street Journal. Retrieved February 25, 2022, from https://www.wsj.com/articles/people-are-going-out-again-but-not-to-the-office-11644843600.