Will the remote work craze sparked by COVID-19 sound a death knell for office buildings?

thePaul Davidson (Via: USA TODAY)

Elliott Holt was always firmly opposed to letting employees work from home.

“There’s no control over it,” says the CEO of a Nashville-based medical records company. “We like to be in control.”

With MediCopy growing at breakneck speed, its work-in-the office ethos spelled a feverish expansion of its physical presence in Nashville. After adding a second office two years ago, the firm was poised to lease a third last month.

But since the coronavirus pandemic has forced MediCopy’s employees to work from home, Holt has had a change of heart. He says he’ll let staffers continue to telecommute for the long term. This has allowed Holt to relinquish both additional offices, convert his headquarters into a training center, and save $350,000 a year in leasing costs.

“Things are working the way they are,” he says.

Elliott Holt, CEO of MediCopy

As states lift stay-at-home orders and let businesses reopen, companies are gingerly allowing white-collar workers to return to office buildings. This process comes even while weighing how much companies really need the space. About half of U.S. employees worked from home during the COVID-19 shutdowns, according to the Brookings Institution. And many companies – including Facebook, Google, Twitter and Morgan Stanley – plan to continue allowing at least some staffers to telework at least some of the time even after a vaccine is available and the health crisis is over.

That could mean a seismic downsizing of the $2.5-trillion office market and the urban centers that have flourished around them. This includes the restaurants, bars and high-end retailers that rely on white-collar workers’ lunch and after-work spending.

“The genie is out of the bottle,” with many companies embracing remote work, says Victor Calanog, head of real estate economies at Moody’s. If there’s a major shift to telecommuting, “Do we really need that much office space?”

Downtowns could become speckled with gleaming, hulking office-building skeletons that resemble industrial relics in cities like Cleveland or Detroit. Mirroring the growing crop of empty retail spaces in, well, virtually any American city.

To be sure, analysts don’t predict an abandonment of American offices. In fact, more office space could be needed in the short term to accommodate social distancing requirements until a coronavirus vaccine is widely distributed, presumably next year. That could spark more leasing and construction activity in less-expensive suburbs. Over the long term, most companies might still want workers in the office occasionally to promote collaboration, analysts say.

Wells Fargo's office tower in Charlotte, North Carolina.

“I don’t see a situation where offices completely die,” says Paul Leonard, managing consultant at CoStar.

But even a noticeable pullback in the U.S. office footprint could have a tangible impact on local economies. Effects include reducing city tax revenues, dampening office construction, increasing defaults on commercial loans and threatening nearby restaurants and shops, say Calanog and Mark Zandi, chief economist of Moody’s Analytics.

Don’t expect any overnight changes. With office lease terms averaging 6½ years, any shrinking of the sector will happen over the next several years, Leonard says.

Offices are holding up during crisis

Office buildings have weathered the short-term effects of the health crisis far better than other commercial real estate. This is because insurance, finance and other professional service employees can work from home – unlike front-line restaurant, retail and manufacturing workers. About 96% of office rents were collected in April and May, compared to a 61% collection rate for shopping centers and about 30% for malls, according to CoStar and NAREIM.

Still, although hotels, restaurants and stores have been hit the hardest, professional and administrative services have felt ripple effects. About 4 million office jobs were shed in the first and second quarters, according to Oxford Economics and CoStar. Some firms have permanently shut down. And few businesses are signing new leases amid record job losses, the aftermath of the deepest-ever recession, and a pandemic that could still pose hazards for office workers.

Calanog estimates the office vacancy rate will rise from 16.8% to a record 19.4% by December. He reckons vacancies will top out at 20.2% at the end of 2022. The rate historically has averaged about 10%, he says.

As a result, Calanog expects office rents to decline 10.5% this year, with rates in large cities falling sharply, including a 20.3% plunge in New York City. Office building sale prices are also expected to tumble.

CoStar is more optimistic, predicting that vacancies will begin declining and rent growth will resume next year.

Richard Branch, chief economist of Dodge Data & Analytics, estimates office construction will resume its pre-pandemic pace in 2021 but could be hurt subsequently if large-scale teleworking persists.

Will remote work endure?

That’s the big question: How much will telecommuting become permanent and wreak lasting damage on the office market. Before the pandemic, just 8.1% of workers spent one to five days a week telecommuting, according to CoStar.

About three-quarters of CFOs surveyed by Gartner in March say they plan to permanently shift at least some employees to remote work. 23% expect to move at least a fifth of their staffers to remote work, and why not? A Stanford University study in 2015 found that employees working from home four of five days a week yielded significant productivity gains.

Holt, the MediCopy CEO, says his workers are avoiding hour-long commutes and reducing stress. Company measures, he says, showed they were both slightly more productive and happier when working remotely in the second quarter. The $350,000 in annual lease savings will be used to beef up cybersecurity for home-based networks and profits.

Keith Roberts, president of Zenman, a Denver-based Web design company, plans to go further and ditch the firm’s only office. The 1,000-square-foot space – already downsized from 7,000 square feet – sports an industrial look with exposed piping, Legos and a pinball machine.

Keith Roberts, president of Zenman

“I always felt like we had to have a really cool space” to impress clients and job candidates. He thought content creators, Web designers and developers had to be together to brainstorm ideas on a whiteboard.

Roberts says that collaboration occurs just as effectively through video chats and other applications, without the office distractions.

“COVID has shown me we can be more productive remotely with the tools and technologies that exist,” he says. “In retrospect, the pinball machine and cool space was more ego than a requirement to function. Clients have become more accepting of virtual companies with no physical space.”

Even some call centers that depend on the esprit de corps forged in group settings are embracing remote work.

Normally, the 127 representatives at St. Louis-based Communications for Research, which recruits people for surveys, benefit from listening to one another’s calls, asking questions and high-fiving when they corral recruits. During the pandemic, most worked from home and kept up on activities through video meetings and chats, says co-CEO Colson Steber.

“It absolutely changed perceptions,” he says.