Many (self-proclaimed) visionaries have been spending the year shouting, “The office is dead!” Meanwhile, old-school commercial real estate players, the ones that own most of the building stock, see the pandemic as a painful, protracted episode that will ultimately pass. These owners have resigned to minimizing the damage while they weather the storm and wait for the world to return to normal.
They’re both wrong.
Stripping away sensationalism and wishful thinking, here is what we know. Face to face is the most robust communication. We can try to replicate it with video calls and maybe even VR one day but it will never create the same connection that we get with talking to someone else in person. True, meaningful collaboration needs high bandwidth, being in the same room with someone is the best way to avoid distractions. Human beings have evolved to prefer group interactions and most big projects need multiple people working together in order to be completed well.
At the same time, on the real estate side work schedules will shift to a different mix of in-office and remote work. If and when hybrid work (part in-office, part work from home) and desk sharing arrangements (“hotdesking”) become more popular, real estate needs will change.
The office state of mind
Would you rather have a bad commute or pay high rent? Who wouldn’t want to choose “neither?” Ever since the invention of the telephone, futurists have predicted the rise of remote work and the demise of the city. They made similar predictions when faxes came along and again with email. Somehow, this prediction still hasn’t come true. With widespread adoption of video conferencing, those prophets are at it again.
Anyone who has been on a four plus person Zoom conference is painfully aware of the limitations of video conferencing. Focusing on multiple participants, confined to small windows on a laptop screen, strains the eyes, and muddles the conversation. You miss the non-verbal cues, the body language. Participants zone out, get distracted, turn off their cameras. In short, they aren’t as present as when they are physically present.
One-on-one video calls are less taxing and do convey more nuance than phone calls. For most routine communication, video isn’t much better than audio alone but for newer relationships and/or complex discussions, they are an improvement, albeit still not as good as meeting in person.
To borrow a term from computing, the problem with remote working arrangements is bandwidth. Bandwidth is the maximum rate of data transfer across a given path. You get more information across in a 100 word phone call than in a 100 word email and even more via videoconference. But you get the most data in the least time face to face. It’s simply the highest bandwidth form of communication.
Some tasks, like working on a spreadsheet (or writing this article) don’t require that much bandwidth. For the occasional input from a colleague, a quick Slack or call is fine.
Other tasks like new product development involve cross functional teams and rapid iteration where the high bandwidth of face to face makes a big difference. To be clear, it’s not that you cannot do high bandwidth tasks remotely, they’re just harder and slower that way.
People in jobs with a lot of low bandwidth work can work remotely for a long time without major losses in efficiency but there are limits even there, especially when it comes to establishing new relationships like hiring senior people or investing in a startup or infusing new hires with your company culture. These are tough even under normal conditions, try doing them entirely remotely. Doable, but again, it takes longer to get to that same level of comfort and camaraderie.
Every job from Starbucks barista to investment banker consists of high and low bandwidth tasks. The “optimal” mix of remote vs in person varies from role to role but it is almost never anywhere near 100 percent remote.
Historically, employers have underestimated how much work could be efficiently done remotely. In part this was a trust issue. Also, in the past organizations lacked collaboration software, data security capabilities, and proper training. For many, it simply wasn’t necessary to build these out.
COVID changed that. It suddenly became critical to remove those roadblocks in order to survive. Having built those capabilities (and trust!), employers won’t just turn them off later. If an employee asks to work remotely a few days a week, an employer is now likely to consider that request against a more accurate assessment of what elements of that role can efficiently be done remotely.
But while employers are likely to be more flexible about work arrangements, the (vast?) majority of work will still get done in the office.
Another point that the prophets of remote work missed is that most people find extended remote work isolating and disheartening. Some anthropologists, like Yuval Noah Harari wrote in Sapiens, argue that it is precisely our ability to collaborate that made homo sapiens successful. And the more that collaboration made us successful, the more successful effective collaborators were at passing on their genes and behaviors. Quite simply, we evolved to be happier when working in a group.
That said, working remotely isn’t synonymous with working from home. To satisfy this social need and as an added convenience, an employer could set up a string of satellite offices where their employees can be comfortable and professional. WeWork reintroduced no-commitment daily and hourly desk rentals and several startups are already pitching large employers on purchasing blocks of desk-days for employees to use on demand. As satellite offices are likely in lower rent locations, the cost savings may be meaningful.
How employers adapt
Still, if on average everyone worked remotely one day a week, doesn’t that equate to a 20 percent reduction in central space needed? Wouldn’t that be a huge win? Well, you can’t cut 20 percent of a desk. You need to remove 1 desk in 5… and that means sharing desks.
We’ve tried hot desking before and it wasn’t fun. Even as a consultant in the 90s, at client-site four days a week, we all came back to our own desks on Fridays. Why? For one thing, it was no use coming in to find that the colleague we needed to meet chose that day to work remotely. Also, we had files. Actual, paper files.
Fortunately, calendaring and coordination software have come a long way so that issue is solvable. Plus, paper is passe. In my last office, I had WeWork take the file cabinet out. I needed the legroom more.
So will hot desking succeed this time? Only time will tell. And with commercial lease terms of 3, 5, 7, or more years, even with perfect hot desking it would be a while before tenants could realize savings.
Manhattan isn’t cheap but it is a good compromise location if you have employees commuting from surrounding boroughs and suburbs. Geography doesn’t change when employees work remotely. You have to get very deep into remote work before a prospective employee thinks, “It’s a really long commute but it is only one day a week…”
With years left on most leases, employers have time to implement flexible work policies, set up satellite locations, and get hot desking software in place before making renewal decisions. They can afford to wait and see how occupancy patterns change, gradually taking desks out of “inventory,” to find the new equilibria before deciding if they can shed square footage and/or if they want to move to a different location.
The impact of COVID is playing out on top of other long term trends. Businesses have been moving lower complexity or value added functions out of the traditional high rent urban headquarters to lower rent offices in the suburbs or from expensive first tier cities to more moderately priced second tier cities for decades. While there may be some interaction on the margins (e.g., satellite offices in suburban coworking space may substitute somewhat for the backoffices in the suburbs), in general these trends should continue to play out in parallel with the repercussions of the pandemic.
How offices adapt
Here is the most likely scenario I see playing out.
Employers give employees latitude about how quickly they return to the office. Smart landlords and property managers will want to speed the return to work by helping employers reassure employees by clearly communicating the processes they have put in place to prevent and contain COVID outbreaks and by being as transparent as possible (within the constraints of privacy rights) about exposures. Until we have a vaccine, lower occupancy equates to higher comfort, so to the extent that the BIS can provide data around overall building and floor occupancy rates, elevator usage patterns, etc., that data should be exposed to the tenants. The landlord may even want to make rapid testing available to all employees as a service to their tenants. Landlords who have vacant space in their buildings, like coworking tenants who have defaulted on their rent obligations, may want to repurpose that as flexible overflow space that any tenant can use at no charge if any of their returning employees are uncomfortable with the occupancy rate they encounter on any given day that they are in the office.
These informal understandings during the return to work phase gradually morph into guidelines baked into job descriptions by HR. Human Resources and Corporate Real Estate departments coordinate to set up satellite locations in co-working spaces and build processes and software (and sensors?) to support this network. If a landlord owns office space outside the urban core, this is an opportunity to bundle HQ and satellite office leases and capture this new demand. If not, the landlord can contract with outlying coworking spaces and offer packages of “coworking credits” as retention sweeteners. It might even make sense for the landlord to source the hot desking software and offer it to tenants for free so that it seamlessly connects with the flexible overflow space that they have created—and to give the landlord visibility into usage trends in advance of lease renewals.
Over months or years, excess desk capacity becomes apparent to all and hot desking is gradually rolled out. Excess space is sublet (if possible) or reconfigured as conference rooms or common areas. As leases approach renewal, central office space needs will likely be moderately smaller. Uptake in remote work will likely happen roughly evenly across the employee pool so the geographic center of gravity won’t shift much. All this means that central offices will shrink but won’t shift much. This excess capacity will hurt owners in general but smart landlords will want to get ahead of this trend and try to find tenants for the extra space in advance of lease expiration. With a new tenant in hand for excess space, landlords might even be able to increase revenue and/or lock in the existing tenants for longer terms by letting them shed the excess space in exchange for exit fees and/or early lease renewals.
In short, the office isn’t going anywhere. Even though it doesn’t make for snappy headlines, the office of tomorrow looks a lot like yesterday’s, just a little smaller and a little more diffuse. Nimble and adaptive real estate players will thrive on the new opportunities but the dinosaurs will suffer. But, then again, this has always been the case. The wheel continues to turn and those not prepared for it will always inevitably get steamrolled by it.