The Covid-19 pandemic forced many professionals to shift from working in offices to working from home. Now, even as vaccination rates grow, companies remain uncertain about when, how — and in some cases, whether — workers will return to their pre-Covid-19 office routines.
Data from Google shows that workplace activity in London, New York and San Francisco is running at half what it was before the pandemic. For companies that opt to require fewer employees to be on-site each day, one question looms: Should managers make the long-term decision to get rid of a portion of their office space?
Based on our decades of professional experience in the finance of urban planning and real estate investments, we believe that the answer should be yes for many companies.
There are already signs of this shift. For example, in New York City, office vacancy rates have risen 11.3 per cent in the past year and now stand at the highest level in 27 years. That's true even though New York-based firms such as JPMorgan Chase and Goldman Sachs have been some of the most outspoken about getting workers to return to offices quickly.
WHY HAVE AN OFFICE?
Economists argue that firms prefer to have their employees work in the same place at the same time for two reasons.
First, it makes it easier to monitor workers. This claim is supported by reliable evidence, especially for salaried employees (programmers, accountants, etc), whose effort is difficult to measure. If a business relies on proximity and actual observation to determine who's working hard, it will be more challenging to move its core activities out of an office.
The second reason for companies to have offices is to support unstructured exchanges of ideas. Although this is a well-established notion, there is very little evidence to support the claim that informal conversations encourage creativity. While research shows that unstructured interactions help people exchange information and build networks, no studies show that this increases the overall productivity.
These two reasons for having offices — supervision and informal interaction — have always been apparent. However, for many companies, the degree to which they matter has changed after a year of working remotely.
Naturally, a manager's ability to monitor a remote team depends not only on the nature of the work but also on the manager's skills. Not every manager has the skills required to be a good leader of a remote team, but these abilities get better with practice. Many leaders have become adept at video check-in meetings and even hiring workers without in-person meetings.
Employees have also become more adept at interacting via technology, whether this is done by videoconferencing or by messaging platforms such as Slack. Supporting these technologies requires investment, but the highest cost of switching to remote or blended work — the cost of adapting to the new technology — has already been paid.
Technological advances have helped companies realise that more work can, and should, be done online in remote environments. Although survey results vary, some academic estimates suggest that around 20 per cent of workdays will be spent at home. This indicates that offices will need only about 80 per cent of their pre-pandemic capacity.
FACTORS TO CONSIDER
The following factors should guide companies as they think about not only how much square footage of office space they will need in the future, but also the location of that space:
ATTITUDE OF EMPLOYEES
Surveys show most office workers actually want to go back to an office — but only two or three days per week. Since it's unlikely all employees will be in on the same days, providing an attractive workspace will require less space than it did in the past. Also, the quality of the space should become more important than the quantity, and companies should focus on smaller spaces that provide better services and amenities.
PROXIMITY TO CLIENTS, CUSTOMERS AND AMENITIES
As companies shift to a hybrid or full work-from-home model, the benefits of being located next to other firms' offices may decrease due to reduced density. Being physically close to your clients and collaborators becomes less critical when more people work remotely, so the benefit of having an office in a central business district is likely to decrease. At the same time, being close to amenities may matter more. If you're travelling to the office mainly to socialise with colleagues, rather than do heads-down work at a desk, being near restaurants and parks becomes more important.
CHANGING COMMUTING PATTERNS
In the past, a key consideration in choosing office locations was making sure they can attract the best people. As trips to the office will not necessarily be frequent, more people will live further away from their office. This will make access to short-distance commuting options (such as subway stops) less important and long-distance transport options (such as proximity to highways or commuter rail stations) more valuable for office locations.
Talented workers will be attracted to offices where they can work more productively and focus on activities they cannot do from home. This will require less space, but the location and quality of office locations will be critical.
Since the built environment has a significant influence on the natural environment, real estate is an integral part of companies' environmental, social and governance strategies. Constructing, maintaining and powering office towers consumes immense resources. As companies reimagine and reassess their need for physical space, the current crisis may be the perfect opportunity to start using office space more efficiently.
Landlords may be more willing than ever to renegotiate contracts. This means even companies locked in long-term deals can now try to rethink the way they use office space.
Most managers may find they don't need as much office space as they did before Covid-19 — and the space they do need will work better for employees if it's carefully designed for hybrid work models.
- Nikodem Szumilo is an associate professor of economics and finance of the built environment at University College London. Thomas Wiegelmann is a managing director of Schroder Real Estate Asset Management.