It's been a rough 18 months for office buildings and the people who invest in them. Back in March of 2020, millions of American workers were told to pack up their desks and start doing their jobs remotely until the coronavirus situation improved. And a year and a half later, many are still working from home. That's done a number on office REITs (real estate investment trusts), many of which have seen their value decline since the pandemic started.
Earlier this summer, it seemed like things were actually looking up for office buildings. COVID-19 cases were dropping on a national level, vaccination rates were growing, and a number of major employers were making concrete plans to bring workers back to the office. But then the Delta variant took hold, forcing many companies to rethink their near-term reopening plans. And now, some won't be returning before 2022.
Of course, at some point, things are apt to settle down with regard to the COVID-19 outbreak, and once that happens, workers should be able to return to offices more safely. But some companies may still opt to shed office space -- not due to safety concerns but because they simply no longer need it.
Such is the case for State Street (NYSE: STT). The asset-management giant recently announced that it will be shuttering two of its New York City offices to focus on a hybrid working model instead. And if more companies follow in its lead, office REITs could be in for a very rocky road ahead.
Will hybrid work models hurt office buildings?
The logic behind State Street's decision is simple. Since employees won't be asked to show up to an office every day, there's less of a need for office space. And so the company has opted to reduce its real estate footprint rather than pay for square footage it may not need.
It's a strategy more employers are likely to adopt, especially if remote work drags on. The longer employees are forced to stay out of offices, the harder it will be to bring them back on a full-time basis. And so other large employers like State Street may decide to settle on a hybrid work model and downsize office space in the process.
Of course, State Street's news is especially unwelcome given the hit the New York City office market in particular has taken. During the pandemic, the vacancy rate for New York City office buildings reached a 30-year high. And if more companies decide to go hybrid and close locations, real estate investors could see the value of their REITs tumble.
The good news is that State Street is still keeping some New York City-adjacent offices open. And it says it will be adding a shared workspace in Manhattan. But still, office REIT investors have every right to be worried at this point. Between companies opting to downsize their square footage and delayed reopening plans, it's a very difficult time to own a piece of the office- building space.