What's next for the future of the office? - Milford Asset

What’s next for the future of the office?

Roland Houghton

Investment Analyst

Roland joined Milford in May 2016 as an Investment Analyst in the Sydney office. His role at Milford is to research, meet and analyse a range of companies to identify potential opportunities. He is based in the Sydney office. Roland graduated from Victoria University of Wellington in 2014 with a Bachelor of Commerce, double majoring in Finance and Marketing. During his studies he worked at GMI in their KiwiSaver department, and after completing his degree, Roland worked as a junior Portfolio Manager at a boutique funds management company based in Sydney.

It has been a turbulent few months in markets due to COVID-19. “The Great Lockdown”, “The Corona Crash”, whatever you want to call it – these have been truly unprecedented times (the most popular phrase of 2020). These events have permeated into most economic sectors, positively impacting some whilst annihilating others. Property has been one of the most affected, from empty office buildings to ghost malls, this sector has seen a significant upheaval. Here, we will have a look at the Work-From-Home (WFH) phenomenon and its potential impact on the office.

The Government-mandated lockdowns resulted in most of us abandoning the traditional office for the home office or, in my case, the dining room table. This massive social experiment, for the most part, went surprisingly well. Of the many companies we have spoken to, most have seen an increase in productivity. Even with restrictions easing, The GPT Group a large diversified Australian Real Estate Investment Trust (AREIT), highlighted that physical occupancy for their office buildings in mid-May was between 10% and 15%.

This whole trend raises a range of questions:

  • Is the increase in productivity due to adrenaline and/or responsibility being given to many for the first time? Is it sustainable? Or will humans revert back to their old habits?
  • What impact will there be on genuine collaboration? The micro conversations we have around the office can lead to value-add ideas. Generally, people are opposed to calling colleagues or managers to have these small conversations – they feel they need to have a particular reason to pick up the phone.
  • If social distancing becomes entrenched in our habits, workspace ratios will presumably have to increase – Cromwell highlights occupancy ratios have compressed by 30% over the past decade. How much more space would be required under this scenario? Would this offset the increase in employees WFH?
  • Are people enjoying WFH because everyone else is doing it and they aren’t missing out on anything? When people start going back to the office, do those who show up and get more face time with the boss have a better chance of getting that promotion?
  • All these questions and more go to make up the most important question of all: what will happen to demand for office space?

Unlike previous downturns, we now have the technological capabilities to facilitate WFH. From Zoom to Microsoft Teams, we can remotely collaborate and communicate more effectively than ever before. Zoom in its first quarter update reported 169% annual revenue growth!

It would also be foolish to ignore the many CEOs claiming that either all or a chunk of their workforce will be WFH into perpetuity. Mark Zuckerberg sees 50% of his staff WFH in 10 years, and Twitter CEO Jack Dorsey is allowing his entire workforce to stay home for as long as they wish. “Our bias against working from home has been completely exploded”, according to Dan Spaulding, Chief People Officer of Zillow.

There are a range of studies on this topic and we have looked at many; however, the following three were particularly interesting:

Gartner surveyed 317 CFOs and Finance leaders and found that 74% of companies plan to permanently shift to more remote work post COVID-19[1].

On the other hand, Gensler conducted a study of 2,300 employees (rather than CEOs and CFOs!) and found that only 12% of US workers wanted to WFH permanently – “What our research found was that people overwhelmingly want to return to the office”[2].

Finally, a similar study conducted by Global Workplace Analytics that surveyed 2,865 employees found that 77% of respondents wanted to work at least one day a week at home, compared to only 31% pre COVID-19, with the median response being two days a week from home [3].

So, what does this all mean for the future of office?

It is fair to say working from home is here to stay and that companies will become more pragmatic with their space as they efficiently rotate their employees. This will, in isolation, lead to a decrease in demand for office space, the extent of which is very hard to quantify at this early stage. Most surveys seem to indicate that employees want to work at home two days a week. You could therefore simply assume that there will be 40% less demand! This of course is unlikely to be the case.

In our opinion, the office is by no means dead and will likely continue to play a range of important roles such as attracting and retaining high quality staff and helping to create and maintain a strong culture. In addition, there are many other factors to consider when analysing demand for office space – from high-level, cyclical, supply and demand drivers to more granular items such as tenant tenure and market rent levels. Undoubtedly, there will be some negative long-term demand impact from the WFH success. Whether this is only 5% or as high as 20% we simply don’t know at this stage. We will continue to ask ourselves the questions presented in this article and will follow these developments with interest.

Disclaimer: This blog has been prepared by Milford Australia Pty Ltd ABN 65 169 262 971 (AFSL 461253). You should not rely on any information in the blog in making any investment decision.

It is for general information only and does not take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. Past performance is not a guarantee of future performance.

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