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.
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.
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