The Future of Offices

December 31, 2020

The Future of Offices.

What will work look like in the future? Many pundits are shouting that the office is dead. Now that we know working from home works, we are never going back. The other side claims this is only temporary and that once it’s safe to return, we will all be commuting and 9-to-5ing again. Neither position is completely right, but both arguments have merit. The truth is somewhere in the middle. How it all shakes out has large implications for owners and developers of office space.

Working from home has worked out far better than many predicted. Many employees love it. But it doesn’t work for everyone. Circumstances vary widely. It’s hard to work from home with young kids. And successful working from home requires resources like a strong internet connection, a separate space, and an absence of distractions. Not everyone has those things.

The sudden onset of work from home makes it easy to forget that the trend to non-traditional office work was well underway before the pandemic. Many companies had already experimented with flexible work arrangements. It wasn’t all that rare for people to work from home on Fridays. Hot-desking was a thing. More than a few companies had ditched offices and gone fully remote already.

The real estate sector embraced this trend early on. Developers were building office space with flexible floor plans. Residential REITs like AvalonBay and Equity Residential were adding work and meeting space to their apartment complexes. Co-working spaces weren’t just rapidly proliferating: WeWork had become the largest office tenant in the US before it’s spectacular downfall.

The pandemic has rapidly accelerated the trend to work from home. It used to be the lucky few and now it’s everyone. Hopefully more of us will have a choice about where to work than we did before. What it looks like when we get to arrange our setup to our liking isn’t easy to predict. But it’s likely to, and already is, making big changes in real estate overall – not just in the office sector.

Witness the many office workers moving out of the city to the mountains, or to the countryside, or even back home. No longer is the choice limited to the high rents of the city or the long commute in from the suburb. Instead, they can just skip town altogether, and many have. So much so that they precipitated a property price crash in San Francisco and a corresponding spike in values in Lake Tahoe. Rents fell in Manhattan, and then rose in the Hamptons. If where we work is optional, where will people settle long term? Does our urban-suburban-rural setup remain relevant?

Near Term Effects

Office space is not elastic. The typical office lease is 5-7 years in duration. Most tenants haven’t had their leases come up for renewal since the pandemic. So, demand for office space hasn’t changed much. It’s still not clear to many companies what their space needs will be going forward. They may need less space as not all employees will spend 40 hours a week in the office. On the other hand, they might require more space for social distancing. So far, most tenants are renewing their existing leases for similar amounts of square footage.

Some firms have already announced they will go without offices completely. REI, the outdoor retailer, surprised the real estate world, when they decided not to occupy their brand new purpose built office headquarters in Redmond, WA. In a headshaking reversal, they announced that 100% of office employees would work remotely going forward.

Before anyone could wonder what would happen to their never-used office, Facebook bought it for $368 Million. Somewhat confusingly, Facebook made this purchase right after Mark Zuckerberg told his Facebook employees they were free to not only not come into the office, but to move anywhere in the country. He forecast that eventually half of Facebook would work from home. The other half apparently still needs offices, hence the purchase and the hybrid approach.

REITs have been furiously preparing offices for the return to work. They want to make their buildings safe, healthy, and attractive to their tenants. Boston Properties, the largest office REIT in the US and a leader in sustainability, drafted in health experts to conduct research on how to make indoor office space safe in Covid. They then published a detailed 25-page guide and shared it with the real estate industry. The guide suggests many recommendations for operational adjustments within the building management system.

Building features that previously were taken for granted, like indoor air quality, cleanliness of surfaces, and operable windows are suddenly top priorities. Offices with good ventilations systems are boasting about their refresh rates and PM levels. The REITs with green buildings, and the certifications to prove it, could be at an advantage in the short term as it will be far easier for them to implement these changes. Any tenants with leases coming up are certainly looking at safety and health first and foremost as they make their decision.

Long Term Changes

When the pandemic is more of a painful memory than the current reality, we might see offices differently. We tend to think of the office as our “second space”, i.e. where we spend most of our time when we aren’t at home. What if it isn’t? What if the office is more like the gym? As in, you’ve got a membership to it…now how often do you go?

When the office isn’t mandatory, it becomes a perk. It has to compete. To entice use, it must be better than working from home. To hire the best talent, and get it to come in, companies will need the very best office set up. Not just better coffee and nicer food but also cleaner, healthier and more comfortable. More productive and efficient. And not by a small margin. But by enough to cover the time and cost (and carbon footprint) of that tortuous commute.

When companies choose their next new office they might be thinking less space, but better. They’ll want space that meets their new reality. They’ll want buildings that are:

  • Safer and healthier. Air quality is the new must have. Health and Well-being is the new foosball table.
  • The ability to stay open through the next pandemic, flood, wildfire, heat wave, power outage.
  • A building that helps them meet climate goals and the transition to low carbon.

The Office REITs committed to sustainability already offer these features. Their portfolios boast many certified green buildings. Some, like Empire Realty—owner of the Empire State Building—have already adapted their buildings to WELL and Fitwel standards. These newer certifications let tenants know the building is optimized for health and wellbeing.

The more sustainably minded REITs have also prepared their buildings for climate change (see last quarter’s Spotlight for more information on climate resilience). Their buildings use less water, can operate in higher temperatures, are resilient to flooding, and hardened against stronger storms.

They are ready for the growing number of companies who are making climate commitments. Companies concerned with their carbon footprint need to lease space that is energy efficient and offers renewable energy. They’ll want green leases that help them minimize emissions, waste, and water use.


Post pandemic, there may well be less need for office space. Cities like New York are already talking about offering tax incentives to encourage owners to convert offices to apartments to alleviate the housing crunch. Green Street, the real estate research firm, predicts a fall in office demand of about 10%.

If some office buildings are no longer needed, we think it’s unlikely to be the ones on the sustainable end of the spectrum because they are fit for purpose in the new reality. The REITs that own those buildings may well experience more demand, not less.

Please refer to the Prospectus for full risk disclosures. All data as of December 31, 2020 and subject to change daily.

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