Time to Call the Landlord?

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Rob Chrisman's Perspectives
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Since mid-March of 2020 residential lenders, vendors, title companies, and thousands of businesses around the United States, and the world, have worked from home. Up until mid-March, some segment of companies operated out of space owned by the company itself. Other segments operated in leased commercial spaces. Although there has been some promising news about vaccine tests recently, analysts believe that the downturn of the commercial real estate market due to our upcoming office space glut is going to have a huge impact on our economy next year and potentially beyond. Should lenders be worried?

We are already seeing the beginning signs of the shift through sublease efforts. With all the talk about working from home, either for an extended period or forever, commercial real estate values are expected to be hit and, in some locales, already are. Obviously, the highest impact on office demand is from employees who are now working from home.

But there are two countervailing forces that employers are reconciling, regardless of industry. The first is the basic work from home (WFH) model. But employers are already trying a return to offices but not having the employees packed in like sardines. In speaking with commercial real estate veterans, for all the tech companies that are strongly encouraging their people to stay home until at least mid-2021, there are other “old world” companies that are starting to have their companies’ staffs come back in as we move through the fourth quarter. A recent STRATMOR Operations Workshop showed that large lenders have over 90 percent of their employees working from home after having retooled and equipped their employees. Or perhaps they were already working from home.

Across many industries, WFH will likely spur alternative setups of office space. One such alternative is “office hoteling,” in which workers dynamically schedule their use of workspaces such as desks, cubicles, and offices as an alternative approach to the more traditional method of permanently assigned seating. Office hoteling may also be made available to primarily smaller employers by independent commercial real estate firms that provide desks, cubicles, and meeting space to employers on a shared, as-needed basis. This approach has the advantage of making occupancy expenses a largely variable expense whereby employers pay for office space as they use it.

But “hoteling” employees lose the “home away from home” atmosphere. No family photos, no mementoes. No swag from the last mortgage conference. Companies are reacting by surveying employees and asking them their preferences. As one would think, parents of small children will have a different perspective than a single person in their 20s.

Tech companies and professional service organizations, e.g., law, lending, consulting, and accounting firms, are likely candidates for hoteling arrangements. Such firms generally believe that face-to-face contact among professionals is a key contributor to innovation and problem solving. But this does not necessarily require five days a week at the office. Employees of such firms may find themselves working one or two days a week at the office under hoteling setups: the remaining days working from home. Operations staff (setup, underwriting, closing and post-closing, processing) have adapted.

Nationwide, regardless of business, leases that come up for renewal are being looked at very closely, either to renew, sublease, or give up entirely. Certainly, any plans for new space have been put on hold entirely. STRATMOR’s poll showed that no large lenders are planning to grow office space. Interestingly, for some companies having a remote workforce has freed them from hiring constraints, and opened up the talent pool. It’s okay to hire a closer 1,000 miles away, or an underwriter in Alaska.

Letting lender commercial space behavior serve as a proxy for other demands on commercial space, late 2020 and 2021 is probably not the best time to be an owner of office space. In general, the best current estimates on office occupancy so far indicate a decrease in overall occupancy by 5-10%. We can expect a new distribution of where that occupancy occurs: So far suburban office has been suggested to ultimately (next five years?) do better than urban.

For the mortgage industry, the rise of WFH will substantially lower office space requirements and costs to the detriment of the commercial real estate industry. Unfortunately, the commercial sector also faces severe economic hardships in the hospitality and retail sectors unless, or until, the threat of COVID-19 is largely eliminated. And the expected downturn of the commercial real estate market due to our upcoming office space glut will likely have a measurable impact on our economy next year.

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