Will Our Economy Survive with Us Working from Home?

Commercial real estate takes it on the chin, while construction is putting on the brakes.

Your company is still paying for that office space you left to work at home.

Your company is still paying for that office space you left to work at home.

Working at home and loving it? We understand. No commute. Flexibility to pick up the kids, run errands. You have settled in, equipped your home office, and life is good. A contented worker is a more productive worker, says management, who for most of 2021 had no choice but to go along with a work-at-home plan. Most workplaces effectively shut down when the COVID-19 pandemic started and office workers were sent home to work.

But trouble is brewing. It turns out that many—besides your management—have depended on you being in the office. Your daily slog has supported all manner of industries. You sitting at home is not sitting well with them.

Your company is directly feeling the economic impact of you working from home. Not only have they had to buy you extra equipment for your home office, but they have also been left holding the bag on the office space you vacated. Most companies lease their office space and are locked into long-term leases. The average lease is 7.5 years in duration. In the hottest real estate markets (like New York City and San Francisco), it was in the company’s interest to lock in for a longer time frame. Salesforce.com signed a 15.5-year lease for its towering waterfront headquarters in San Francisco. It has lost $216 million in keeping that space over the last year. The company scrapped plans for 325,000 square feet of office space in a nearby location back in March. Neighboring Dropbox dropped even more: $416 million. Owners of some prestigious buildings have indicated that they will be leaving the offices when their leases end. United Airlines is vacating 150,000 square feet of office space, about a sixth of its space in the third-tallest building in the country, the Willis Tower in Chicago.

Not a Good Time To Be a Landlord

What can a company do with all that fancy, pricey downtown office space after being locked into a long-term lease? Many companies have sought to sublet their spaces. Salesforce.com is subletting half of its 450,000 square feet of office space. With sublet renting at 27 percent less on average than a direct lease, this has the effect of lowering average office rental prices. There is currently 21 million square feet of sublet space available in New York City, according to the Wall Street Journal.

Big landlords, which often operate as real estate investment trusts, have had their stock prices take a hit. Shares of Boston Properties, one of the largest office landlords, were down 29 percent from the pre-pandemic high, according to the New York Times. Another landlord, SL Green, is trading 26 percent lower than in pre-pandemic times.

Coming to work for part of the workweek, the hybrid workweek that seems to be emerging as a compromise, will be a partial salve to landlords’ wounds. Landlords estimate that their profits would fall 30 percent with employees spending three days a week working at home.

A few companies harbor the hope that business will return to normal. Amazon, Facebook, Google and Apple—some of the companies that were among the first to send their workers home—have announced plans to add to their office workforce in New York City. The most bullish on returning to the office has been Amazon, stating in its company blog in March 2021 that its “plan is to return to an office-centric culture as our baseline. We believe it enables us to invent, collaborate, and learn together most effectively.”

Young Workers Will Resist the Return to the Office

But I don’t want to go back to the office. Younger workers are more likely to resist returning to spending every day in the office. (Picture courtesy of New York Times.)

But I don’t want to go back to the office. Younger workers are more likely to resist returning to spending every day in the office. (Picture courtesy of New York Times.)

Companies eager to return to office business as usual may not be taking into account hardening attitudes in favor or workplace flexibility, which has been most commonly associated with younger workers. Some new hires may not have ever come to the office. The decision to return to full office capacity will “pit older managers who view working in the office as the natural order of things against younger employees who’ve come to see operating remotely as completely normal in the 16 months since the pandemic hit,” according to “Return to Office Hits a Snag: Young Resister.”

In addition, workplaces have not settled on protocols—whether only vaccinated workers can return to the office, for example, resulting in a confusing hodgepodge of rules—or no rules at all as they wait for rules to be supplied by governments and government agencies.

Companies that were quick to accept the first wave of workers back may have felt good about installing hand sanitizers everywhere and instructing cleaning crews to perform daily deep cleaning, both tactics that has been discredited but remain popular. The facilities crew may have pulled desks apart and placed Plexiglas panels between them, creating transparent fortresses. Few companies have upgraded their HVAC systems for increased airflow and installed HEPA filters, both tactics proven to block the virus.

Trickle-Down Effects

In just a year, the market value of office towers in Manhattan, home to the country’s two largest central business districts, has plummeted 25 percent, according to city projections reported by the New York Times, which will result in a $1 billion shortfall in property tax revenue.

Indirect losses from workers no longer commuting downtown every day are felt by the transit companies (fewer buses and trains, fewer workers), downtown restaurants that catered to the lunch crowd, parking lots (and their attendants), the services that supplied your high-rise (coffee, toilet paper, cleaning), happy-hour bars, the gas station you now infrequent, the two trucks you won’t need, the body shop that had to remove your dents, the shops from which you bought business casual outfits, and so on.

The effect spread beyond office districts to residential districts. Citizens who loved to eat but were loath to cook took to food delivery. You stopped going out to be entertained, and instead binged on Netflix. Comedy clubs, music spots and live theater shut down. Hotels suffered, too. With Broadway shut down, why visit the Big Apple?

Commercial Real Estate Takes It on the Chin

The building owner of commercial real estate is next in line for suffering. New York City and San Francisco—long thought of as gold mines in the real estate market with consistently ascending rental rates—was suddenly full of closed shops and empty office high-rises from which little or no rent was forthcoming. Weakened by the rise of online shopping, many brick-and-mortar shops went under during the pandemic. President Biden called NYC a ghost town.

Mounting commercial real estate losses threaten banks and will delay recovery, said a November 2020 headline in the Washington Post. Manhattan’s Signature Bank had set aside $53 million to cover its losses from real estate loans.

U.S. banks have a total of $2 trillion dollars tied up in commercial real estate and a big share of that is in office rental space. The last time commercial real estate fell on hard times (the industry lost $110 billion in 2008), it triggered the Great Recession.

While the short-term effect may have been people staying in and ordering out, the longer-term effects are being felt. Their offices are now only partially occupied, if at all. Many workers, no longer tied to the office, questioning why they pay city rents for a short commute or benefits (shopping, restaurants, theater, etc.) they can no longer enjoy, have moved away.

Office space, the biggest part of commercial real estate sector, was no longer being rented. A Barclay’s report predicted a 20-35 percent drop in property values.

A Glut of Office Space

Companies that have rented expensive downtown real estate, once a perk for a tech worker, are now faced with office space that must be maintained and rent that must be paid.

PTC moved into Boston’s Seaport Village, taking 250,000 square feet of space at 121 Seaport Building. (Picture courtesy of Nerej.com.)

PTC moved into Boston’s Seaport Village, taking 250,000 square feet of space at 121 Seaport Building. (Picture courtesy of Nerej.com.)

Autodesk committed to downtown workspace, opening an additional 117,000 square feet of office space near its San Francisco OneMarket office in June 2021. I’ve returned from a visit to Graphisoft headquarters in Budapest, where I was greeted by CEO Huw Roberts, who had come in for the occasion. We had to turn lights on as we toured the building as hardly anyone was in. PTC signed an 18.5-year lease for two-thirds of the 17-story swanky, elliptical Skanska tower in Boston’s Seaport District—office space in Boston’s waterfront—and moved in the year before the pandemic hit and then had its employees work from home starting in 2020.

How many will come back to work is anyone’s guess at the moment. Jamie Dimon, CEO of JPMorgan Chase, the largest employer in New York City, is guessing that he will need only 60 desks for every 100 employees.

Build It and They May Not Come

New York City was one of the places hardest hit by the pandemic. Before the pandemic, the city had been planning to add 25 million square feet of office space in the next 2-4 years. Those plans are most certainly being scrutinized.

The U.S. commercial real estate market contributes over a trillion dollars to the economy annually, as measured by the NAIOP (the Commercial Real Estate Investment Association) in its February 2021 report, supports 8 million jobs, and generates over $300 billion in salaries and wages. That’s down slightly from the 2019 report (which had over 9 million jobs and $1.1 trillion in contributions). The value of the North American commercial real estate market is estimated to be around $10 trillion dollars, according to Statista.com. Let’s put that in perspective. The value of the U.S. stock market is about $50 trillion, about 5 times the size of the commercial real estate market. The value of the automobile market is 2 orders of magnitude less (around $80 billion) than the commercial real estate market. Small perturbations in big markets are enough to set off recessions—even depressions.

The Great Recession of 2007-2009 was triggered by subprime loan failures, primarily in the residential real estate market, a market that is just slightly bigger than the commercial real estate market.