One high-profile investor believes the remote work trend might not be as durable as many think. Keep reading to learn more.
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In a recent interview, Barry Sternlicht, chairman of Starwood Capital Group said that “the work from home phenomenon is a U.S. phenomenon.” He said that people are back in the office in Europe, Asia, and other parts of the world.
What’s more, Sternlicht doesn’t seem to think it’s going to last. He said that “nice buildings are still leasing,” and that a “nice little recession will clear this.”
Is he right? Will a recession — and accompanying uptick in unemployment — put pressure on workers to be willing to return to the office? Or is remote work here to stay?
Does Sternlicht have a point?
To be fair, Sternlicht is completely correct about the remote work trend being a U.S. phenomenon. According to data from real estate firm JLL (as reported by CNBC), U.S. office occupancy is around 40%-60% of pre-pandemic levels, depending on the city. In Europe, office attendance is 70%-90% of pre-COVID levels, and in some Asian cities, office attendance is actually higher than it was before COVID-19.
However, there are some good reasons for this, and they don’t have anything to do with work being more productive in offices. For example, American homes are simply bigger than in most other parts of the world and are therefore more conducive to remote work. Plus, in many areas of Europe and Asia, public transit is faster and more convenient, making the commute issue less of a problem.
Sternlicht is also correct that higher-quality office properties are still leasing nicely. Recently, Empire State Realty Trust, which owns a portfolio of high-quality Manhattan offices, reported that its portfolio is over 91% leased, over 3 percentage points more than it was a year ago.
When it comes to the comment of how a “nice little recession” would cause a return to the office, Sternlicht is making the point that the labor market has been exceptionally tight in the U.S. and workers have essentially been able to name their terms in many cases. One survey found that 39% of workers would quit their jobs if they weren’t allowed to work from home any longer. But if a recession made it significantly harder to find another job, would that still be the case?
What do workers really want?
To be fair, there are arguments to be made both for and against working in offices. Many employers believe that in-person work is more conducive to productivity and creativity than remote work, and there’s a good argument to be made that early in a worker’s career, the visibility that comes from working in close proximity with supervisors can help with advancement. On the other hand, as Sternlicht correctly points out, many workers view long commutes as a waste of time and believe they are actually more productive from home.
There’s also the issue of what workers want. One 2022 Gallup study found that about 56% of full-time workers in the U.S. say their jobs can be done remotely. The majority (60%) of remote-capable employees prefer some sort of hybrid work arrangement, and only 6% prefer to work exclusively in the office. However, the percentage of those that prefer exclusively remote work is steadily rising.
What is the future of office buildings?
You may have seen headlines about a “commercial real estate crisis” that’s expected in the United States. And most of the stories that talk about this are specifically referring to office buildings.
Here’s the problem. Not only are office buildings (as a whole) being utilized less, but many were purchased in recent years at high valuations and with extremely low-interest financing. This could lead to a wave of defaults as office owners are unable to refinance their properties.
One possibility is an excess of office space being repurposed for other uses, particularly as residential properties. Not only could office-to-residential conversions help restore supply-demand balance to the office industry, but the U.S. is facing a shortage of about 4 million homes to meet the needs of its population.
In fact, Willy Walker, CEO of commercial real estate finance company Walker & Dunlop, recently said that office-to-multifamily conversions could be a big part of the solution to the housing crisis, and that several cities are even starting to offer tax incentives to encourage office owners to do this. To be sure, not all office properties could practically be converted to residential, but many could.
A rapidly evolving office and workforce dynamic
Whichever side you’re on with the remote versus office debate, one thing is for certain — the remote and in-person work dynamics in the United States have evolved more in the past five years than in the past 50. And it’s likely to continue to evolve rapidly, especially with the pending financial issues many office operators will be facing within the next few years.
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