One Big Thing
Over the past few decades a battle has been raging over office layouts. Office tenants have been reducing the amount of space available for each employee for years, going from large private offices to small private offices to cubicles and eventually open office plans / hot desk arrangements. Companies have continued this trend despite a mountain of evidence piling up that open office spaces hurt productivity and actually cost more in the long run than simply providing employees with a reasonable amount of space in which to do their jobs.
The reason that this has occurred is fairly straightforward: while office worker productivity is somewhat abstract and difficult to measure, saving money on lease payments by shrinking square footage is easy to quantify and shows up in a line item on a company’s P&L. Businesses took the easier-to-quantify approach, even if it hurt their actual performance and office landlords got swept up in the collateral damage.
I bring this up today because we are about to see the same thing happen all over again. What I’m referring to is the pandemic-enhanced work from home (WFH) trend, coupled with ESG investment pressures that will impact the office market for years to come. Green Street hit the nail on the head in a recent Office Insights Report entitled WFH Updates: More Tech Titans Weigh in on Remote Work:
Intersection of WFH/ESG Trends: Increased WFH utilization could bring many benefits, from the perspective of both employers’ (cost savings) and employees’ (less commute time, more flexibility, etc.). So far, many of the arguments in favor of WFH have focused on these benefits. However, there are potentially less obvious advantages to a more remote world, including lower greenhouse gas emissions and employee wellness, which are ESG (Environmental, Social, and Governance) factors.
In fact, there has recently been a couple of anecdotes in support of the intersection of WFH and ESG:
• In late September, the Metropolitan Transportation Commission, a regional government agency responsible for transportation planning and financing in the San Francisco Bay Area, voted to move forward with a proposal to require employees at large companies to work from home three days a week with the goal of cutting greenhouse gas emissions. The proposal is part of a broader package of environmental/economic policies (dubbed the Plan Bay Area 2050 Blueprint) and was added by the commission based on public feedback. Notably, the proposal reportedly ranked among the most popular climate-related plans (70% – 80% support) per the San Francisco Business Times. While the plan is still in its early stages and the commission likely does not have authority to enforce its proposal (if passed), it is nonetheless a noteworthy development.
• The “green movement” has grown in popularity and is likely to be of continued focus by governments and companies alike. New York passed major legislation last year, which targeted carbon emissions generated from commercial properties (Will Going Green Have NYC Office Owners Seeing Red, 6/20/19). A law in Germany has been proposed to make WFH a legal right. It is therefore not unreasonable to think that the combination of WFH and ESG/climate-related regulation will strengthen in the future.
Here’s the thing about ESG: while generally good for the environment, it’s measures are often expensive for companies to execute and often a drag on the bottom line in early years, even if they do lead to superior results over time. Adapting buildings and capital equipment to achieve a lower carbon footprint can require a large upfront investment and can take years to pay for itself. Please note that I’m not arguing that ESG it is bad, but some measures are undeniably expensive to implement. Want to know what isn’t expensive? Requiring employees, enabling employers to claim lower carbon footprints from commuting, while at the same time reducing lease liability by effectively outsourcing the cost of office space to employees (think the ride share model).
While WFH is clearly taking hold, evidence is beginning to pile up that these arrangements are not all that they are cracked up to be and, in fact are hurting productivity. Of course WFH is generating big-time pushback within the real estate community as well. It is virtually impossible to log in to Linkedin these days without seeing posts – mostly from tenant/landlord reps, office brokers and landlords – touting the virtues of office employment and making the case that the asset class is not in fact declining and that WFH will ruin collaboration and productivity. While it almost comes across as desperate pleading at times, these posters are 100% correct but the reality is that it doesn’t matter.
I’m writing this post as someone who is as big a proponent of the collaborative benefits of having a team together in a well-laid-out office as you will ever find. I did not enjoy working from home for an extended period of time and am a lot more comfortable when I’m get to spend time around the rest of the RanchHarbor team, collaborating face to face, sharing ideas and working on projects together.
At some point, WFH will generate a large amount of pushback but, despite the Linkedin proclamations of the most Pollyannaish office brokers, I don’t think that we are close to that point. If the evolution of office space in recent decades has taught us anything, it is that companies will take advantage of low-hanging fruit that provides an instant boost to their bottom line over actions that yield better long term results but are harder to quantify in the short term. WFH, combined with ESG is the textbook example of such low-hanging fruit for companies looking to tighten their belts.
The confluence of ESG benefits and cost savings from a reduced real estate footprint is a very real issue for the office market going forward. There will be continued pressure from governments, environmentalists and ESG-compliant investors. Companies will gladly go along since it is one of the few ESG measures that instantly lowers costs and requires little-to-no upfront investment. The losers will be stressed out employees who no longer have work-life balance, office landlords, and of course the companies that willingly shot themselves in the foot to save a few bucks in the short term.
What I’m Reading
When Your Only Tool is a Hammer: Environmentalists are using wildfire danger as a new tool to make sure that nothing ever gets built in California. Not so fun fact: the main reason that there is so much building in fire-prone areas in the first place is because often-environmentalist NIMBYs have made it so difficult to build in and around cities. The San Francisco Chronicle
Comedy of Errors: CalPERS fired its CIO due to conflict of interest issues – although they should have done it when he cost them $1 billion by terminating their tail risk insurance right before the pandemic hit. Anyway, the new CIO will need to load up even heavier on private equity in order to try to achieve the still-ridiculously-high 7% annual rate of return that the fund needs to pay its beneficiaries but never actually achieves. NY Times
Over Capacity: A record surge in imports is expected to make the congestion recently experienced at west coast ports even worse in the coming weeks. JOC
Cleanup on Aisle 11: BlackRock published a note earlier this week stating that the scale of restructurings in the wake of COVID may exceed that of 2008. They attributed this to the amount of outstanding debt with ratings below investment grade, including loans and private credit, has more than doubled to $5.3 trillion since 2007. Bloomberg
Push Back: Major employers such as Microsoft, Target, Ford Motor Co. and The New York Times have announced recently that they wouldn’t be requiring employees to return to their offices until at least July 2021. NY Times
Chart of the Day
Source: JBREC
WTF
Feeling the Urge: A New Yorker and CNN contributor was suspended for masturbating on a company Zoom call. Vice
Gotta Hear Both Sides: A naked Kansas teenager found covered in ranch dressing was arrested after damaging merchandise in a convenience store and subsequently crashing a car into a post. The Smoking Gun
Basis Points – A candid look at the economy, real estate, and other things sometimes related.
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