What to know now that back to office is back off
The spreading Delta variant is wreaking havoc on back-to-office plans across the United States and elsewhere. In the past few weeks, we have seen announcements from several large companies, including Amazon.com Inc. and Apple Inc., deferring plans to bring staff back in person as the fourth wave of COVID-19 surges.
Indeed, new case counts in the U.S. have surpassed 150,000 per day on a rolling seven-day average basis and despite more than half of the population being vaccinated, hospitalizations with the virus have also skyrocketed during August, approaching 100,000 per day for the first time since late January. And with back-to-school season upon us, the risk that the virus spreads further cannot be ruled out.
The reality is that future waves of the virus also cannot be ruled out given the hesitancy that remains among many of the unvaccinated. Business leaders looking to move forward with their reopening plans are facing unknowns, including whether new variants could arise or if vaccine effectiveness could wane. Until there is more certainty around the trajectory of the virus, cautious leaders will refrain from making big decisions about office space, particularly if productivity remains high among those working from home.
Office vacancy rates have understandably remained subdued as a result. We can see from data out of Kastle Systems International LLC, which measures the number of employees who swipe security cards to enter offices in 10 key metro areas in the U.S., that we are a long way from where we were in early 2020. Its Back-to-work Barometer for late August shows that traffic remains 50 per cent to 80 per cent below where it was in March 2020.
San Francisco had the greatest plunge, with an office occupancy rate of only 19.7 per cent in the latest survey. New York isn’t far behind, at 22.3 per cent. A recent survey from the Partnership for New York City shows that employers expect only 41 per cent of employees will return by the end of September and 76 per cent by the end of January 2022. Just a few short months ago in May, this same survey had anticipated 62 per cent of employees would be back in the office by the end of September, which goes to show how expectations can dramatically change as the virus shifts momentum.
The accelerated transition to working from home, either part or full time, is something we don’t anticipate will disappear even after a large share of workers return to their regular work environments. Survey after survey over the past year has shown that more employees and employers have warmed to the idea after spending so much time renovating and reshaping their day-to-day lives and schedules around a home office. This secular transition paired with the current short-term constraint due to the virus and weakening economic recovery mean that commercial real estate is under severe strain.
Indeed, in an August survey of commercial real estate and finance-related firms conducted by real estate research firm Trepp LLC, 29 per cent of respondents said that national economic conditions would present a headwind by the end of 2021.
Among property types, office real estate garnered the most bearish responses: only around 12 per cent of respondents believe office real estate will have increased transaction activity in the next six months, compared to approximately 15 per cent for retail, 25 per cent for hotels/ lodging, 60 per cent for industrial and 70 per cent for multifamily; and an astounding 90 per cent of respondents believe effective rents and economic occupancy will be below pre-pandemic levels for the next six months, again, significantly worse than even retail and hotels, which are both facing headwinds from the slowing reopening.
Retailers and small-business owners, in particular those who cater to the downtown office crowd, will also be put into a difficult position. Without the foot traffic to bring in sales, many service-oriented businesses in
WE ARE A LONG WAY FROM WHERE WE WERE IN EARLY 2020.
urban areas will be forced to remain shuttered for longer than expected, which means a slower jobs recovery than many are expecting.
The office real estate segment will also no doubt struggle in the near to medium term, but the trend towards a hybrid or full work-from-home lifestyle by millions of Americans means that there continue to be significant opportunities in the work-from-home file.
Industrial real estate investment trusts (REITS), which will benefit from the surging e-commerce sector, and residential REITS (weighted to single-family dwellings) have wind behind their sails. Sectors that cater to a remote lifestyle including electric utilities, software and hardware, cloud technologies, and other home office technologies are all areas that we believe will play a major role as longterm investment themes.