Work From Home: How Bad Will It Get For Commercial Real Estate?
We all know the work from home movement is starting to take hold. Many companies, including some major ones, have already embraced this for an extended period of time. This is really going to change how millions work.
Obviously, there are a lot of companies that will be impacted. For example, the local luncheon will suffer if most of the workers are staying at home. We already see this in many office districts. Businesses that were dependent upon the traffic provided by local workers are suffering. In fact, many of them will close down if they have not already done so.
At the head of this problem is commercial real estate. There are a lot of entities that are going to suffer. Corporations now realize they can cut down or eliminate large amounts of commercial office space they occupy. For this reason, the work from home movement is going to really put major downward pressure on landlords all over the country. This is coupled by the fact that these properties are all mortgaged so we are going to see defaults on the rise.
Major cities are naturally going to be hit in a big way. Many put up with the cost, traffic, and other inconveniences to live near where they work. However, with the work from home idea, one can live anywhere. Here we see how residential real estate can also follow the path of commericial.
San Francisco is a city that falls under this category. It is faced with a high tech community which is strongly aligned with implementing new models of working. This all leads to the likelihood of impact for present real estate businesses.
Pinterest is a company that has realized that it makes no sense to spent more money on office space. The corporation actually decided to spend $89 million cancelling a contract to build out new space. Instead, it will continue to lease the 4 buildings as it allows workers to remain at home and get their work done.
The new project would have cost Pinterest $440 million if it went through.
It means the work from home movement now is saving Pinterest $350 million. This is money that is being sucked out of the commercial real estate industry.
Now multiply this across millions of companies of all sizes throughout the country. Ultimately, billions of dollars are at stake.
This brings up the question as to what is going to happen to these office complexes and downtown areas. Millions of small businesses are already on life support. As they die off, this will only accelerate the problem from the real estate perspective. Of course, we can mention the retail sector which is equally in bad shape and also putting a lot of pressure on commercial real estate owners.
We can expect more stories to come out like with Pinterest. This is a situation that will take years to unfold.
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It's amazing the changes that are coming down the pike and this is a huge one. It is also interesting the time it takes to feel the effects of such a big change. We can see it happening but as you say, it will take years to unfold.
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I'm a big fan of the work from home concept. Yes, while few businesses that depend on the customers in the form of local workers may take a hit, in the long term, this will be a big resource saver. Starting from the load on public transport systems to unnecessary workspace utilization, so much could be saved. The one downside would be decreased interpersonal relationships between colleagues, which is an important part of the dynamics.
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Indeed the commercial real estate space will change after this as the companies have a viable cost reduction method through allowing work from home. And on top of that as the productivity increased they have more reasoning to enable that.
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