The problems surrounding office buildings in our large cities have not gone away despite some erosion in working from home.
Writing back in March about the problems in the office building market, I quoted Michele Wucker:
A “gray rhino” is a highly probable, high impact yet all too often neglected threat: kin to both the elephant in the room and the improbable and unforeseeable black swan. Gray rhinos are not random surprises, but occur after a series of warnings and visible evidence.
Six months on, the problems surrounding office buildings in our large cities have not gone away despite some erosion in working from home (WFH). In a recent report, Goldman Sachs estimated that the share of employees WFH for at least part of the week has fallen from its peak but has now stabilized at a level far above its pre-Covid level:
The share of US workers working from home (WFH) at least part of the week has stabilized at around 20-25%, below its peak of 47% at the height of the pandemic but well above the pre-pandemic average of 2.6%.
The reason for this, concludes Goldman, is a mix of technological innovation (Zoom and all the rest) and worker preference. The latter has carried disproportionate weight at a time of tight labor markets.
So far, there has not been a large increase in formal vacancy rates because leases have yet to expire. As Goldman explains, this will change:
17% of all office leases are scheduled to expire by the end of 2024, 47% between 2024-2029, and the rest after 2030. Our baseline estimates suggest that remote work will likely exert 0.8pp of upward pressure on the office vacancy rate by 2024, an additional 2.3pp over 2025-2029, and another 1.8pp in 2030 and beyond, though this is likely to be partially offset by a decline in new construction.
In fact, U.S. office space may decrease for the first time since 2000 and, quite possibly, in history.
Meanwhile, according to Goldman, with average office utilization remaining at about half of the pre-pandemic level in ten major cities (according to Kastle, a security firm that measures key card “swipes”), firms are going to want less space.
So far as retail is concerned:
The shift to remote work has also changed the geographic distribution of retail spending and employment. While spending on services that require face-to-face contact has now fully recovered in the aggregate, the recovery has been skewed towards suburban areas and away from city centers where traditional office-related activities take place.
Goldman does not come to any conclusion about the impact of WFH on productivity, citing estimates ranging from a drop of 19 percent to an increase of 13 percent, a spread it puts down to different methods of measuring productivity. But the firm also points to more recent studies showing more pronounced negative effects “in industries involving high-cognitive tasks.”
My guess is that productivity is taking a hit from WFH, and that this will get worse as the years go by. The old business of 2019, with its institutional culture, its water-cooler exchanges, its peer learning, and its client base, could survive “in exile” for a while, but over time that must fade. And even if those synergies and that cohesion can largely be revived with workers back at the office three to four days a week, productivity may still be sub-optimal as the temptation to treat the day(s) at home as not quite so, uh, intensive, kicks in. In an April report, the Financial Times’ Craig Cohen noted that in March, “Researchers at Stanford University and data analytics firm INRIX [had] published a study documenting the extraordinary boom in midweek golfing in the US.”
However, if a reasonable approximation of the old status quo does not return, the consequences will be tricky.
Eva Xiao and Oliver Roeder for the Financial Times (August 29):
The implications — for commercial real estate values, local tax receipts and street life, among others — are serious. Larger cities’ business districts seem “stuck” in this new world, said Ferdinando Monte, an economist at Georgetown and co-author of [a study on remote work and urban structure].
The economists found that Covid-19 shocked the fragile equilibrium that made large cities’ downtown areas thrive. People put up with inconvenient commutes and congestion to experience the personal interaction and the exchange of ideas found in major urban centres.
The benefits require others to make the same cost-benefit calculation: people prefer to work downtown if others are working downtown, when the benefits are high, but otherwise stay home when the benefits are low. . . .
Now that working from home has persisted, it has made it difficult to bring a critical mass of people together again in larger cities such as New York, Los Angeles and San Francisco.
As a whole, the largest US cities, defined in the paper as those with more than 1.5mn employees, have stabilised at about 60 per cent of their pre-pandemic downtown foot traffic. The economists quantified this phenomenon using phone mobility data and shared portions of it with the Financial Times.
In smaller cities the pre-pandemic balance has largely come back, according to the study. One explanation is that occupations concentrated in these downtowns are more likely to require in-person work, while the potential benefits of personal interaction were always lower because of the mix of industries present.
“That’s part of the reason why those small cities were small in the first place — there was no need, for what they were doing, to agglomerate,” Monte said. “Those interactions were not as important as they were in New York.” . . .
In big cities, the premium people are willing to pay to live close to the city centre has declined steadily since the pandemic, according to the research. In smaller cities, the premium has bounced back. The price of a house within a central business district relative to those in the suburbs has fallen and never recovered in large cities.
Meanwhile, in some estimates, finding a new price level for office buildings will take ten years. That will be an uncomfortable decade for their owners, those who have lent to them, and the cities that tax them.