FRANK TALK: The Effects of COVID-19 on Commercial Real Estate: Will We Work-From-Home Forever?March 02, 2021 — By Frank A. De Vito
BOSTON–It’s 2021 and it’s still unclear how the pandemic will impact commercial real estate in the long run. While various sectors are doing just fine, others are not.
The lab market is hot as ever, with historically high rents and little available space. To meet demand, office buildings are being converted to lab, not just in Cambridge and Boston, but in other areas too. The industrial market is also vibrant, enjoying increasing rents, consistent leasing activity and low vacancies.
Meanwhile, the hospitality industry and brick and mortar retail are in a tailspin. Many hotels and retail stores are shuttered or operating at reduced capacity. For retail, in particular, the pandemic only accelerated a preexisting trend—the likes of Amazon and big box retailers were already redefining the retail landscape. However, once consumers and business travelers feel comfortable frequenting hotels and stores in person, the hospitality and retail sectors will bounce back. The question is, “Who will survive?”
Office Sector and Work From Home
The long-term prospects of the office sector are a little more uncertain. The current day-to-day occupancy level of downtown office towers has been reported in the 8-12% range. If you have been downtown recently, you know it’s a ghost town.
A glut of available sublease space is on the market right now. In Boston alone, approximately 3.4 million square feet of sublease space became available in 2020, a significant increase over 2019. LogMeIn recently announced it will only need half of the space at its corporate headquarters in Boston. Most of their employees will be permanently remote or remote hybrid—going into the office only occasionally or one to two days a week.
This all suggests the work from home (WFH) phenomenon could redefine how and where we work for years beyond the pandemic. Obviously, remote work existed before the pandemic. Many office workers used to “log in from home” when needed while some worked remotely full-time, though on a smaller scale. However, it all changed when the pandemic hit.
Surprisingly, WFH has thrived. During this time, we’ve learned that most employees in various industries don’t need to be physically in the office to perform their jobs. Improvements in information technology and video teleconference capabilities have been game-changers. There was a WFH ramp-up period, but now everyone’s got the rhythm down.
Although tasks may take longer and the line between work and home can be blurry, employees have proven they can be as productive as in the office or even more now than ever before. They have also come to appreciate the time saved by not commuting and the flexibility of WFH. Employers see the benefits of WFH as a way to save costs and as a perk to recruit and retain employees. But, will this continue after the pandemic is “over”? Will WFH bring about the end of the office sector?
Long-Term, WFH Is Not Enough
Despite the benefits of WFH, there still remains great value in coming to the office. Being physically together with others provides greater opportunity for solving difficult problems, mentoring, brainstorming, collaborating, fostering innovation, ensuring professional growth, and maintaining a company’s culture and values.
On a more basic level, human beings need in-person interaction and crave personal connection. We miss those impromptu meetings, chance interactions, serendipitous conversations, and quick exchanges of information. There’s no such thing as “swinging by someone’s office” on Zoom. After being cooped up at home for almost a year, I’m sure some office workers can’t wait to return to work (and their bosses can’t wait for them to return too). WFH by necessity for 12-18 months is one thing, but WFH forever is another.
Wait and See
Many companies are still evaluating how WFH fits into their post-pandemic plans, and many do not plan to reopen their offices in a meaningful way until at least the second half of 2021. This means the effect of WFH on commercial real estate won’t be decided by the end of 2021.
Some companies, like Twitter and Zillow, will allow employees to WFH permanently. On the other hand, other companies, like JPMorgan Chase and Tiffany & Co., are already requiring their employees to return to the office.
Some employees will be hesitant and concerned to come to the office, especially if they or their family members have underlying health issues. Others will worry if a large contingent of the population refuses to be vaccinated. It’s clear that a large-scale return to office will be gradual and the reentry will take longer than the shutdown.
Many companies may not want to continue to pay rent for empty offices, so they may adopt significant permanent WFH measures, thereby reducing demand for office space. Other companies may return to the office on a full-time basis immediately. The prospects for returning to the office in the Boston market recently improved when Amazon signed its second full-building lease in the Seaport.
Some companies may even require more square footage to meet social distancing guidelines and satisfy employee safety concerns. More likely, however, most of these companies will work with what they have instead of increasing their footprint.
While approaches on returning to the office will vary, office life will never go back to “the way it was” because WFH will remain an integral part of the way we conduct business.
Frank A. De Vito is the Managing Director of the Boston law firm Rackemann, Sawyer & Brewster, P.C.Frank A. De Vito