Will Working From Home Change Real Estate Trends?

Will Working From Home Change Real Estate Trends?

With 80% of Singapore’s workforce said to be working from home over the past two months, I would like to share my thoughts on the longer-term implications of the trend towards working from home (WFH). I will be touching on two main issues – firstly, the viability of working from home, with regard to office culture in Singapore, and secondly, the impact of working from home on commercial real estate, especially in the CBD and business parks.

To begin, I’d like to say that I firmly support the trend towards working from home. For me, the main benefits of working from home are the time saved without the daily rush hour commute and the increased flexibility. The lack of social interaction may be a concern, but I believe that these can be mitigated through socialising in the evenings and the weekends. Moreover, in a normal, virus free situation, my ideal arrangement for working from home would probably include one or two days in the office per week, as I believe that building camaraderie and a team culture is important as well.

Are we over-hyping the trend towards WFH?

A few months back, Jes Staley, the CEO of Barclays, said that “the notion of putting 7,000 people in a building may be a thing of the past”. He said that in the longer term, the bank would adjust how they think about their location strategy. This implied that commercial real estate may see an irreversible shift in tenant preferences.

Interestingly, within a month from those comments, Hong Kong office workers are mostly back to work. HK has been very successful in curbing the spread of the virus, and banks based in HK have reported that they have been running their offices at 50-70% capacity recently, with plans to allow more employees back to their offices. Thus, if WFH is here to stay, why the rush to get employees back to the offices?

With regard to this, I think that we as humans tend to extrapolate certain current trends into the future, and draw our conclusions based on what we’re seeing at present. However, my counterargument to that would be that as leases for office space tend to be of longer durations, by the time these office leases are due for renewal in 4 to 5 years’ time, the pandemic may have blown over by then, which results in changing priorities at the point of renewing the leases.

Social and cultural issues standing in the way

Humans are hard wired to seek social interaction. We form communities and rely on family and friends for support. If we were to be working from home permanently in the future, how then do companies form strong cultures which are a key selling point for recruitment? Think of Google’s offices which include bowling alleys and sleeping pods – aren’t these amenities part of what makes Google such an attractive company to work for?

Thus, I believe that the ideal balance would probably involve in-person team bonding activities at least once a week. People would need places to meet and network, and therefore maintaining a physical office space may still be necessary to support these activities. In this situation, it is very likely that commercial tenants would downsize their space requirements, as the number people in the office at any given time is reduced. One trend which is already taking place would be the practice of hot-desking, which is popular among the Big 4 accounting firms.

On the point of cultural issues, perhaps the following observations are more prevalent in Asia as compared to the West. Firstly, Japan has a bizarre culture which glorifies falling asleep on the job – which supposedly serves as a signal to bosses that the employee has been working to exhaustion. Japanese office culture also frowns on the practice of junior staff leaving the office before their superiors. Additionally, Chinese companies are known for the backbreaking 9-9-6 culture - working from 9 to 9 daily, 6 times a week. With companies increasingly implementing WFH arrangements due to Covid-19, the lines separating work and personal life have become blurred.

When faced with such drastic change, how do managers who are used to these styles of management cope? I have heard horror stories of how some micromanagers have constantly called up their staff to check if they are working. Ultimately, it boils down to trust – trusting employees to get their job done regardless of where the are working. And herein lies the issue – trust is not built overnight, or even over a matter of months. My view is that change in management styles may not go away in the near future, perhaps it may take years, or even an entirely new generation of senior managers to impose change.

City fringe office space over CBD?

One possible trend that has been cited would be the increased demand for suburban office space, while the CBD hollows out. The assumption here is that companies would shun pricey CBD locations in favour of city fringe or suburban areas such as business parks, where rents are lower. The relocation of office space towards suburban locations has already happened for some time; think of banks shifting their back office functions to Changi Business Park, or MNCs opting to relocate their HQs to city fringe locations such as the Paya Lebar Quarter.

For this issue, I don’t think we can look at these two segments in isolation. After all, they are closely interdependent. An intuitive conclusion to make would be that demand for suburban office space would rise, pushing rents up, while demand for CBD office space would fall, pushing rents down.

To me, this is a fallacy, because CBD rents are likely to continue to hold a premium over city fringe rents. Think about this – current Grade A CBD rents are around $10-11 psf/month, while business park rents at areas such as MBC costs around $6 psf/month. Hence, if we were to expect CBD rents to fall and city fringe rents to rise, then the premium between both areas would narrow considerably, maybe to $8 psf/month for city fringe offices and $9 psf/month for CBD offices. Would this be logical? In that situation, why would companies still prefer city fringe locations, if they can get a prime CBD location by just paying slightly more?

Hence, I won’t expect suburban office to perform any better. If CBD rents fall, then rents across the entire spectrum of office locations should fall as well.

Would prime CBD offices be repurposed?

One mitigating factor for CBD office buildings would be that their prime locations still command a certain value. Thus, even of some office space becomes redundant, the land itself can still be sold or redeveloped, most probably into residential or mixed-use developments. URA had launched the CBD Rejuvenation Incentive Scheme in 2019, which encourages the conversion of older office buildings in the CBD, to develop more mixed-use projects to create a more friendly live-work-play environment.

Thus, I wouldn’t completely write off commercial properties, because the land themselves still hold considerable value.

Would cities become less attractive?

This applies more for countries with large rural areas, for example, the US. Some people were prediction a mass exodus from cities, with people moving to rural areas to work remotely. Staying in a ranch or farm while keeping their city jobs. To me, that sounds completely ridiculous. Sure, some people may prefer the slower pace of life there, but think about it – the allure of cities is the ease of access to everything: having your family and friends around you, entertainment options, and basically just having that connectivity. Yes, the novelty of the slower pace of life may appeal to some, but think about our current situation – we can’t even get people to stay home for a couple of months. Apparently, boredom kills. How different would that be if people who spent their entire lives in cities get to work remotely from a farm in Arizona or Texas?

Macro factors driving real estate investments

Macro factors driving real estate prices are equally important when considering the long-term direction of the real estate market.

While rents may drop due to the demand and supply imbalances with regard to tenants, if there is still significant demand for investment properties from investors, we may simply see a compression of rental yields, which means that real estate values hold steady even as rents fall.

Institutional investors or high net worth individuals may continue to view real estate as a hedge against inflation, and simply accept that lower rental yields are the new normal. With interest rates back at record lows after a brief ascent over the past few years, real estate continues to offer attractive spreads to investors.

Think about the trend of Mainland Chinese buyers bidding up the residential real estate prices in Sydney or Vancouver. The main factor driving property prices up in these areas was more because of the influx of deep pocketed buyers rather than the underlying demand from end users (residential tenants). Thus, do consider the larger macro factors at play, instead of being overly fixated on the possibility of falling rents.

Conclusion

While I am highly supportive of the entire WFH exercise, I think the idea that a large majority of us would be working from home permanently would probably remain distant a dream. And the idea that being able to work from home results in a mass exodus from cities into rural areas is even more ridiculous. There are social, cultural, and practical issues which limits an overhaul of how we view cities.

On the impact on real estate prices, post Covid-19, there would definitely be a change in how we utilise office space. But to simply conclude that commercial properties would become redundant would be too premature.

My view is that sprawling cities are here to stay. After all, as the saying goes, when it comes to real estate, it is always about three things: Location, location and location.

Do let me know your thoughts in the comments!

Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.

If you enjoy my articles, please 'Like' my Facebook Page at: 

https://www.facebook.com/AlpacaInvestments/

Follow me on Instagram at @AlpacaInvestments