What will the office market look like after the great remote working experiment?
When lockdown was imposed and workers were forced to desert office buildings en masse, it was a novelty. Hundreds of thousands of employees across the State decamped from bustling city centres to clear out their spare bedroom, turning ironing boards into stand-up desks or even making their own bedroom double up as a home office.
It was, without doubt, the biggest office experiment since so-called knowledge workers begun inhabiting glass walled buildings in the first place.
And yet, it was a long time coming. Telecommuting has been advocated in the United States since at least the 1970s as an approach to avoid the emerging trend of urban sprawl. Calls for remote working increased when technology allowed it and, more recently, as the cost of living and hassle of commuting continued to spike.
Then, in an instant, offices lay dormant as public health required it. So, has the experiment worked and what is the future for the office as we know it?
On the first question, consensus is yet to form. The national remote working survey by NUI Galway’s Whitaker Institute found that 83 per cent of the more than 7,200 people surveyed wish to continue working remotely after the Covid-19 crisis has passed.
Of those, however, only 12 per cent want to work remotely on a full-time basis. Clearly, working from home is an option that people want but most will be disappointed if it became a requirement.
Unsurprisingly, it’s a topic that has gained in prominence over the past months, moving out of management magazines and into the zeitgeist. Ronan Corbett, director and head of offices at Cushman & Wakefield, says the “loudest voices in the room are the working from home advocates who have been talking about it for years”.
“The technology works but that’s as far as it goes. A lot of people don’t really understand what it is to grow and foster a company’s ethos and you can’t do that from home. You can’t run a business on Zoom,” said Corbett.
“It’s only within an office environment that you can foster a corporate culture or the learning environment – where junior staff can be trained,” noted Brian Moran, senior managing director of multinational property developer Hines.
Irish sentiment on remote working appears to be shared internationally, indicating that a landmark shift seems unlikely. A Morgan Stanley report issued on Tuesday examined European attitudes to working remotely. It found that 82 per cent of the 12,500 people surveyed would like to work away from the office environment more in the future.
Of those, almost half want to work from home only one or two days a week while 32 per cent would do so three or four days a week.
This ambivalence about working from home in the longer term perhaps tells us that the status quo will hold in the commercial office sector. As if to prove that point, Facebook on Tuesday agreed a deal to lease 730,000sq ft of office space for thousands of employees in New York.
This is the same company that said in May that about half its workforce would work remotely over the next five to 10 years. For a company embracing remote work, it’s certainly sending out mixed messages.
Dr Maeve Houlihan, associate dean and director at the UCD Lochlann Quinn School of Business, said that, often, companies like having “statement buildings” to “communicate a message around community and lifestyle”.
“There’s always the external communications bit about showing the public ‘who we are’,” she said. Her view is that, once this crisis passes, there will be “a strong desire for place”.
That’s not to suggest there won’t be any move to tinker around the edges of office portfolios. Dr Houlihan wouldn’t be surprised if companies downsize, “but it’s not a death sentence” where the office is concerned, she says.
That view was backed up by Morgan Stanley boss James Gorman, who caused consternation with his comments on the office when lockdown set in, noting that it was clear, going forward that the bank would have “much less real estate”. But last month, he clarified that the bank “will remain a major player in the commercial real estate market globally”.
“Are we going to be radically expanding real estate across the firm over the next five years? I doubt that very much. But are we going to be radically shrinking it? I doubt that very much,” said Gorman on an earnings call in July.
The suggestion is, therefore, that prime, well-built offices will likely retain their appeal.
“HQ-style offices, a significant, visible high profile presence may take on a certain role given that certain functions have to be in an office,” said Goodbody analyst Colm Lauder, adding that he would be optimistic where those buildings are concerned. “I’ve seen a few examples in the UK with firms saying they’d rather dispose of secondary, tertiary offices and focus on a HQ-type place.”
What that could mean in practice is that, instead of having regional buildings, remote working could be encouraged as well as the odd trip to Dublin. Because Dublin has certainly not lost its appeal, especially for international investors.
“There are a lot of enquiries out there,” developer Johnny Ronan told The Irish Times, adding that, this time, “we’re not overbuilding”.
“The vacancy rate in prime Dublin is still very low,” he said.
With a net vacancy rate of 2.7 per cent, Dublin remains a challenging city in which to locate high quality office space. According to figures from Cushman & Wakefield, there is demand in the market for 2.5 million sq ft of office space.
For the past number of years, demand has run at about 3 million sq ft, indicating that the drop off hasn’t been significant.
Though rents will likely take a hit, Dublin continues to be a city in which office investors want a piece of the pie. “We forget this, and it’s an Irish thing that we’re very down on ourselves, but Dublin is in a good place right now internationally. There are a lot of cities around the world that would give their left arm to be in our position with tech occupiers driving growth,” noted Cushman & Wakefield’s Corbett.
With interest rates lurking in negative territory, there is an onus on institutional investors to seek out yield in commercial property. Office investments are a place where investors can gain exposure to the “world’s biggest companies, and thus the strongest covenants”, Johnny Ronan says.
Goodbody’s Lauder supported that view, noting that there is “all this money chasing yield”.
“For high quality [commercial office space] I’d expect some valuation hits in the near term but I wouldn’t be overly worried in the medium to long term,” Lauder said.
If anything, Ronan sees this as a “once in a century’s event”. “Why would a prime investment on a long lease to Facebook, Amazon, Google or Salesforce be more expensive in other European cities than Dublin? There is no logical reason and investors are beginning to see that fact,” he said referencing the fact that prime yields in Dublin are higher than the European average.
But even for Ronan, who is perhaps well insulated given that his list of office tenants reads like a who’s who of technology companies (Amazon, Facebook and Salesforce are all clients), the pandemic will cause a rethink on some projects.
“The hotel has to be rethought,” he said when asked about a planned development on Tara Street – the AquaVetro tower – which is currently the tallest permitted building in Dublin, running to 23 floors and comprising hotel and office space.
Not only that, but office design will have to change, he says. “The days of packing them in like sardines; I think that’s gone.”
Nevertheless, the ebullient developer is optimistic about office rents, given that new starts on speculative development will “likely be subdued over the next 12 months, which will translate into increased rents in the longer term as occupier demand takes off post-Covid but supply remains constrained”.
But a separate source who has had considerable success in the commercial property sector noted that the bias slant at the moment is negative for rents.
While he was broadly positive, he added: “At this point, I wouldn’t be a buyer because I don’t think you’re getting paid to take the risk around the future economic disruption [and] the structural shift in terms of unemployment.”
Rents aside, Brian Moran of Hines agreed that some cities will face “major challenges around high density offices”.
“Dublin is a different paradigm to London or Paris. We do not have the same reliance on mass public transport. A lot of people can hop on a bike. So we don’t have the same challenge to get our city back to work again,” he said.
But even if the office sector is spared hardship, it’s difficult to imagine that the commercial property sector as a whole, and the retail sector in particular, will escape unscathed.
“From a sentiment perspective we could be close to the floor [where retail is concerned],” noted Colm Lauder, adding that values of Irish retail spaces probably have about another 20 per cent to fall.
“For a long time, you took a building on Grafton or Henry Street and the rental income from the ground floor would have been so sufficient that they didn’t need to develop the rest. We need to try and inject some vibrancy.”
“Retail is hurting, there is no doubt about that,” said Ronan in agreement.
Hines, which has $3.8 billion (€3.19 billion) in assets under management in the Republic, also has some retail space. Moran noted that if you have a prime pitch and a sophisticated retailer, the property will be fine.
“From a landlord’s perspective, the key is curating the right mix of retailers in your shopping centre. If you have old school retailers, get rid of them,” he said, adding that “I think you’ll see an evolution into partnership with retailers and landlords where rents will be linked to turnover”.
But even sophisticated retailers, as well as high profile office occupiers, have had to make staff redundant.
And as it appears that we’re only at the beginning of a period of liquidations and layoffs, many have begun to compare this crisis to the last. Ronan points out that this is very different. “In the old days, the banks were handing out money like slot machines, that’s not the case now.”
Whether a public health crisis is better or worse from an economic perspective clearly remains to be seen. But whatever happens, it appears that the office sector, in some form or another, has copperfastened its standing in cities, even if the architecture and the space between desks may change.
Interesting that it required everyone to work from home to arrive at that conclusion.
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