The coronavirus pandemic has changed the way a lot of people work -- not just now, but most likely on a long-term basis. Earlier this year, many companies closed their offices and shifted their staff to remote work due to health and safety concerns. And while remote work has been a mixed bag, it's also proven itself as a viable model for companies in almost every segment of the market.
That opens the door to a world of flexibility for companies going forward. But it also puts office buildings in real danger.
Office building demand could wane to a dangerous degree
When employees were first told to pack up their desks and work remotely back in February and March, many assumed it would last a few weeks. But now, nine months later, many companies are realizing remote work is a sustainable model, with the potential for major cost savings. If workers can maintain productivity from afar, businesses can spend less on office space.
In fact, that's precisely what many companies intend to do. A good 68% of large-company CEOs say they now plan to downsize their office space, according to a survey by KPMG. And that's not just in response to the pandemic.
The survey, which mostly included companies with more than $1 billion in annual revenue, suggests that even if a vaccine comes quickly and the pandemic wraps up sooner than expected, remote work arrangements will still greatly remain in play. In fact, many companies plan to divert resources to automation and digital technology that allows them to sustain a remote work setup. In the absence of expensive office leases, that's more than feasible.
Not only can embracing remote work help companies save money via downsized office space, but it also opens up their talent pool. With a remote staff, any given company can hire someone from anywhere in the country. The trend also allows companies to abandon larger, costlier cities and instead set up shop where rent is less expensive.
A blow to real estate investors
Long-term remote work may spell opportunity for employers and employees alike, but for real estate investors, it's bad news. Office REITs, or real estate investment trusts, face a major hit if companies continuously dump square footage, but major cities will likely bear the brunt of the shift. In fact, Vornado Realty Trust (NYSE: VNO), which owns and operates offices and retail properties in New York City, has already taken a beating this year, as has SL Green Realty (NYSE: SLG), Manhattan's largest office landlord.
But it's not just office buildings that will suffer if remote work becomes a mainstay. Smaller businesses that surround office buildings, like restaurants, bars, and shops, will also see their revenue take a major hit in an absence of foot traffic.
Of course, one thing that might save office buildings is work-from-home fatigue. For many employees, remote work just doesn't cut it, and over time, more companies may find that their staff is more productive when they're working under the same roof.
But the fact so many large companies plan to dump office space should sound an alarm with investors. Though it's too soon to declare the office building is dead, it's more than fair to acknowledge that demand is changing in a very meaningful way.