The Long-Term Threat to Office Demand is Getting Real

About a month after the US lockdowns for the pandemic began, Morgan Stanley CEO James Gorman told Bloomberg Television that it had become clear to him that the firm could operate with “much less real estate.” The productivity of Morgan Stanley’s hastily-assembled remote workforce turned out to be strong enough that he could see a future where “part of every week, certainly part of every month, a lot of our employees will be at home.”

As the pandemic wore on, more and more companies were coming to the same conclusion, either mulling out loud the benefits of a permanent remote workforce or actively making plans to move in this direction. In a Gartner survey in April, 74% of CFOs said they intend to move at least 5% of their previously on-site workforce to permanently remote positions post-COVID 19. Nearly a quarter of respondents said they will move at least 20% of their on-site employees to permanent remote positions.

Examples of such firms include Nationwide, Barclays and tech firms such as Twitter and, most recently, Facebook.

CEO Mark Zuckerberg announced last week that up to half of Facebook’s employees could be working remotely in five to 10 years.

At first, office landlords were unsure what to make of these announcements. It seemed to be a trend but then again, emotions have been riding high during the pandemic. And more than one analyst has noted that similar intentions were vowed after 9-11—namely that companies were expected to move to the suburbs to escape high profile, urban buildings—which never came to fruition.

But increasingly analysts are starting to project a change in demand for office space in the intermediate and long-term following COVID-19.

“We might not see immediate distress in the office sector,” says Victor Calanog, head of CRE Economics for Moody’s Analytics, in a video on the subject. “However it is subject to risk in the intermediate and long run.”

Calanog, though, believes this shift will not necessarily lead to a mass movement of employees working from home, but rather a return to—does this sound familiar?—suburban office parks. “If dense, urban areas fall out of favor, nearby suburban offices may become popular,” he says. Besides their larger footprint, suburban offices typically have rents that are about 50% less than prime locations, which will be attractive as the economy is expected to struggle for a while.

It is possible that companies will forget their plans after the pandemic, Calanog says, much like what happened after 9-11.

“But the longer this crisis goes on, the higher the chance that change will set in and become semi-permanent,” he says.

To be sure, the jury is still out on whether remote working will become a widespread and permanent trend. Many doubters, though, seem to accept that some change will be necessary and that may well include a suburban presence.

Last week Boston Properties CEO Owen Thomas told CNBC that remote working will be a temporary trend.

“The ability to mentor younger employees, the spontaneous collaboration and creativity that occurs, and also the culture that companies develop, it’s very difficult to do it when we’re all on Zoom” he said on Squawk Box.

Thomas appeared to echo the possibility that in response to the pandemic, more companies will move to the suburbs. During the interview he pointed to some businesses’ moves to set up smaller, satellite offices in the suburbs instead of asking employees to commute to downtown.

In another example, earlier this month former Google CEO Eric Schmidt told Face the Nation that he believes that office space will be in greater demand after the pandemic subsides.

“We’re going to have to think about hub-and-spoke systems where local people don’t travel so far because they don’t want to be in public transit for so long,” he said per Business Insider.

Companies will have to come up with flexible arrangements because some employees will want to be back in the office and others will be afraid of the possible exposure to COVID-19, he said.

“So imagine that there are three or four people: one will go to the office, one will stay home, some will go to some local or near-their-town working environment,” he said. “It will change the pattern.”