The Future of Offices When Workers Have a Choice

By Doug Proleg of the New York Times, Click for New York Times Website

 

Some work spaces in central employment districts may become housing, and some housing in residential areas may become work spaces.

Some work spaces in central employment districts may become housing, and some housing in residential areas may become work spaces.

Coronavirus will not kill the office. If anything, it figures to be more dynamic than ever. The ability to work remotely will not drive most people away from cities and offices, but it will enable many to live and work in new ways and places — while causing its fair share of disruption.

Even before the pandemic, there were signs of trouble with the office market in the handful of cities where the “creative class” had been flocking. In 2018, net migration to New York, Los Angeles and San Francisco was negative, while the U.S. economy grew at a healthy 2.9 percent. Creative magnets like London and Paris were experiencing similar declines.

The explanation for the declines — mostly high housing costs because of severe limits on new construction — obscures other forces that were destabilizing the traditional office market. In the middle of the 2010s, Amazon, Facebook, Google, Apple and others started splitting their headquarters into multiple locations. Stripe, one of the world’s most valuable start-ups, went a step further. In 2019, it “opened” a remote hub, hoping to “tap the 99.74 percent of talented engineers living outside the metro areas of our first four hubs” in San Francisco, Seattle, Dublin and Singapore.

For the fastest-growing companies, being able to tap into talent anywhere became more important than having all their teams in one place. Smaller cities were good enough. In retrospect, this shouldn’t have been a surprise, despite all the talk about the importance of giant, dense labor markets to fuel innovation. After all, Silicon Valley itself is not a city but a cluster of sprawling towns scattered along a highway.

The defining characteristic of this new version of the creative class may not be where it lives, but its ability to live anywhere it wants. Put differently, people move to certain cities in search of better-paying jobs, but it’s now possible to earn high (if not the highest) salaries from almost anywhere. That has been true in certain smaller cities in recent years (Austin and Denver in the United States, for example, and Manchester and Leeds in Britain). To a lesser extent, it has also been true for people who chose not to live in cities at all.

There were more specific signs that the office market was headed for a crisis. While employers were fighting over talent, many employees found traditional offices lacking. In 2019, Leesman, a firm that measures employee experiences, analyzed how the workplace affects employee productivity, pride and enjoyment. Drawing on 719,000 respondents in 4,771 workplaces worldwide, Leesman found that nearly 40 percent of employees felt their workplace did not enable them to work productively.

Then the pandemic forced many employees to reassess their preferences. Multiple surveys have found that many are happy to continue to work remotely and would move, if given the chance. Still, this data tells us little about the post-Covid world. Those who thrived initially might burn out if they stayed home for a more extended period. Those who struggled might do much better once they’ve mastered new tools, once they have access to alternative spaces near home, or once children, housemates and partners are back in school or at work. At the same time, the technologies that allow us to work, learn and socialize remotely will only get better.

Covid-era market data also offers mixed signals. Landlords and brokers are quick to point out that companies like Google and Facebook signed new leases during the pandemic. But these companies hire thousands of new employees every quarter and plan their expansion many quarters or years in advance. Even companies that aren’t in growth mode have yet to make up their mind about the new normal. Instead, many are renewing their existing leases for a shorter period until market conditions become clearer. Data from JLL, a real estate consultancy, shows that renewals as a share of leasing activity have jumped to 51 percent from 29 percent pre-Covid, and that leases are becoming shorter.

It seems safe to say that total demand for offices will diminish to a moderate degree. The bigger changes will be in how total demand is reshuffled and what office providers will have to do to remain competitive. Most office activity will not move to homes or to the cloud. Instead, it is likely to be redistributed within and between cities, with a variety of new employment areas popping up and saving many people the trouble of simultaneous commuting to a central business district.

At the end of the 19th century, most American urbanites walked to work; as late as 1930, Manhattan’s residential population was larger than it is today, meaning the city was more mixed in terms of land use, not dominated by office towers. It’s not hard to imagine that many will once again prefer to work within walking or biking distance of home.

As a result, buildings in many traditional employment districts will have to compete more fiercely, and a small but significant percentage of office space will most likely have to be repurposed into housing, e-commerce fulfillment centers, delivery-only kitchens, health care centers, meeting spaces, event spaces and other uses.

Residential areas, street retail shops and hotels may have to accommodate more daytime workers. Signs of this shift are already visible. The nation’s largest multifamily operators, Avalon Bay Communities and Equity Residential, have been adding work and meeting spaces to their buildings for a few years now.

Common, the largest co-living operator, is partnering with local governments to develop new types of live/work communities. Hospitality brands like Starbucks, CitizenM and Mandarin Oriental have been experimenting with converting local coffee shops and hotel floors into work spaces that can be booked by the hour or day. And city governments are working to redistribute jobs and services across residential neighborhoods.

Post-Covid for example, a Brooklyn or Queens resident who previously commuted to Manhattan may opt to work several days a week in a shared space within a 10-minute walk from home. Some large employers are already experimenting with satellite offices in the suburbs of cities in which they already have a downtown headquarters. The main office will remain important for most companies, but fewer employees will be expected to be there all day, every day.

The office will become more of a consumer product. And just like every consumer product, the office will have to continually fight for its customers and meet their needs — not only when it’s time to renew the lease. Offices will need spaces for specific tasks like focused work, team brainstorming, client presentations and employee training. And they will need to be more focused on individuals, even if these people work for a large company.

These changes will be gradual, but they will have a significant impact on urban office buildings, which used to be perceived as almost as safe as government bonds. Consider, in comparison, that the “retail apocalypse” that led to multiple bankruptcies and the closing of tens of thousands of stores was a result of less than 12 percent of all activity moving online, over a period of two decades, while total sales were still growing.

Over the next decade, the transformation of the office market figures to be less comprehensive, but it will probably happen faster and to an industry that is far less prepared. And just as in retail, it will create some new winners, as well as a multitude of losers — those unwilling or unable to adjust to an era of worker choice.