Work from Home Sticks

Many have already chimed in on this, but a brief recap: enterprises are likely appreciating remote workforces for a variety of benefits, including reduced costs of physical space and ability to source talent from anywhere. Employees, too, are likely to appreciate a permanent transition. The technology is largely there in terms of cloud infrastructure and security to enable WFH at scale. So, it is likely working from home sticks.

The slow opening of the economy will be a force factor, too – suggested phases discourage crowded workspaces, leaving companies with the option to have half the staff in the same space, or reduce space and have a team elsewhere. WFH shows more compelling math.

2018 data already reflected that 15% (around 22M people) of the workforce had days they only worked from home, with 5% (8M) working entirely from home.[1] Another 18M or so claim that they could work from home, and many more are likely to gain the ability to do as this event pushes employers to make remote work possible. So inside of the next few years it wouldn’t be crazy to imagine half of the workforce making the jump – an April study saw 34% working from home currently.[2]

To be clear, I don’t think this means that in the next two years enterprises move to an entirely remote model. But I do think those who have experimented in this crisis will gravitate toward making it an available employee option.

Certainly, companies will still need space, but I expect them to pull back materially and to leverage flexible spaces when they need to get a larger team together. Others may keep space but find it more valuable to do so outside of major cities, opening satellite offices or migrating their HQ to the suburbs.

This is a less surprising move when you consider that much of the value of having the gang altogether – the serendipitous water cooler conversation – is likely to be thwarted by social distancing measures anyway. The magic of having a communal gathering space is lost when employees can’t congregate over lunch or even chat without 6 feet between them. As a result, Twitter and many others have gone fully remote; Twilio expects 20% of it’s office-based employees will transition to working remotely in the long term. [3]

Whether companies go fully remote, move some offices, or simply downsize, the impact on commercial real estate should be material. Alphabet pulling out of its SF space is just the canary – expectations have markets like SF down 20-30%. [4]

A Migration from the Metros

Already, we are seeing people take COVID-19 as their cue to flee the cities and take to remote regions with less health risk, pollution, crime, etc. Some argue this is temporary, but there is good reason to suspect otherwise. There is also trend data that predated COVID-19 that suggests a migration was already underfoot.

Service workers whose roles survive the crisis will be more likely to be remote given their roles allow for remote work. Those people can live wherever they want, and increasingly I expect enterprises to happily leverage their WFH capabilities to source talent in regions where the cost of living is low and talent is cheaper.

In NYC, the city population has already been declining over the past three years, and COVID-19 has certainly caused a lot of departures. While some argue this won’t outlast coronavirus given the enormous benefits of living in a bustling metro, consider that a post-COVID-19 world will have a lot less to offer.

Restaurants are likely coming back with a social distancing mandate, i.e. fewer patrons in more real estate, putting enormous pressure on profitability. Some restaurants will be able to pass along the costs to customers and continue running dine-in; others will shrink their dine-in spaces to focus on delivery and pick-up, or become ghost kitchens with no public physical presence whatsoever.

This would all serve to make dining out a luxury, likely reinforcing a dine-at-home trend and the demand for delivered prepared food or meal kits. The fact that a good chunk of restaurants aren’t surviving this at all also makes a dent. NRA data showed that 3% of the industry had already closed down permanently and a further 11% were planning to do so by the end of April.

Much of retail will have shuttered or be struggling with social distancing. Theaters and public events will be closed, made virtual or be otherwise substantially different. There’s reasonable speculation that the experiences that define big cities – eclectic retail, exceptional cuisine, unique experiences – will have to migrate to the suburbs to find affordable alternatives to their current locations.[5] And of course the reliance on public transport in high-density regions has become a lot more unappealing.

So it isn't surprising that, according to one recent poll, 39% of urban dwellers are considering a permanent move to the suburbs or an even more rural area.[6]

A Tough Reality for Those Left Behind

Combined with the shifting labor landscape, this crisis is likely to grow the divide between income classes, and in so doing change the face of cities globally. On the other side of this equation will be employees who cannot work from home – healthcare personnel, sales associates, and the many people who will end up in manufacturing / warehousing / delivery roles post-COVID-19. These individuals can’t leave, and they will have some other unfortunate realities in common as well.

Perhaps unsurprisingly, the ability to WFH skews strongly toward higher-earning individuals. 61% of earners in the 75^th percentile and above can work from home, while only 20% of the 25^th-50% percentiles and 9% of the population in the 25^th percentile or below can work from home. Departures in New York are already offering a window into how this dynamic plays out. 5% of the population left the city from March 1^st to May 1^st; among those in the bottom 80% of income there were few departures, but among the top 5% more than 30% had left.[7]

The group that remains is likely to struggle financially in the wake of all this, given unemployment and related impacts, and this group’s economics will likely change the physical landscape.

Why? The recession that surrounds COVID-19 has already hit savings, and should result in tightened credit that would make home ownership less tenable. And in fact, a transition to apartment living was already underfoot. In 2017 the share of new homes being built as rental apartments was at its highest level in four decades. Home ownership was already much more inaccessible to millennials than previous generations – the homeownership rate among millennials, ages 25 to 34, is around 8 percentage points lower than it was for Gen Xers and baby boomers when they were in the same age group.[8] Some data in 2019 and a favorable rate environment suggested the tide was turning back to new homes, but this crisis is likely to reverse the course.

In addition, the flight of the wealthy would shift the tax base and put tremendous pressure on city finances. City funding will already be under pressure, of course, given a substantial portion comes from sales and income taxes that will not be collected given the impact of the lockdown. Office space escaping the cities also wouldn't help. I expect that impact to show up in reduced infrastructure improvements. For example, public transport could be hurt by declining funds. Today, sharing a train is obviously not compelling for sanitary reasons, but defunded transport could mean that even after a vaccine the lagging infrastructure will not be a viable alternative for commuters. This could drive a reversal of the trend of the last decade toward ride sharing and reinforce an enthusiasm for owned vehicles where commuting remains relevant.

Also, Lyft and Uber were already angling for the logistics market – does the growing demand for last-mile delivery and the reduced enthusiasm for ride-share pivot their models entirely? Or from a broader view, does the coronavirus create a pullback from the sharing economy and require more personal investment generally, including more privately owned cars, vacations and experiences?

“Home” is Different

Over the past two decades, developers building on valuable land have been maximizing value with multi-unit buildings – low rises are down from 92% to a 48% share while mid-rises have climbed to 41% (7x) and high rises to 11% (5x)[9]. If there is reduced demand for home ownership given financial pressures, I expect real estate owners to focus investing on multi-unit rental properties.

New appetites and a different experience of “home” from those who work remotely could grow an appetite for new rental formats as well. Everyone focuses the WFH conversation on the enterprise – what new collaboration tools or security infrastructure is needed - but a transition to more permanent WFH arrangements also wipes out what remains of the already blurry work/home boundary. “Home” changes when it is also an office. That might mean more dedicated space at home for Zooms, maybe more interest in external storage to reduce clutter and definitely more deliveries. It might mean more substantial changes, like increased appetite for 3 bedroom units for families with two at-home working parents, or demand for units with more flexible space and amenities.

Property owners trying to survive this new world may take these cues and develop spaces currently occupied by single family homes or small multi-units to build more amenity-rich high rises, competing for tenants with contactless access for maintenance, virtual support, concierge support for deliveries, etc. Importantly I don’t think those amenities will be reserved for the high-end buildings, but that we’ll see democratized versions of amenity-rich rental living.

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Are you leaving the city for rural life? Send us your thoughts, and check back next week as we discuss how brands and retailers will have to adapt to consumer preferences changed by coronavirus. To see previous posts and the intro to this series, please go to https://jumpcap.com/blog.

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[1] BLS and Census data.

[2] Brynjolfsson et al. “COVID-19 and Remote Work: An Early Look at US Data.” April 2020.

[3] Frier, Sarah. “Tech Workers Consider Escaping Silicon Valley’s Sky-High Rents.” Bloomberg, May 2020.

[4] Loizos, Connie. “Commercial Real Estate Could Be in Trouble, Even After COVID-19 is Over.” TechCrunch, April 2020.

[5] Thompson, Derek. “The Pandemic Will Change American Retail Forever.” The Atlantic, April 2020.

[6] Cohen, Arianne. “Should you Flee Your City?” Fast Company, May 2020.

[7] Quealy, Kevin. “The Richest Neighborhoods Emptied Out Most as Coronavirus Hit New York.” NYTimes, May 2020.

[8] Nova, Annie. “Here’s Why Millions of Millennials are Not Home Owners.” CNBC August 2019.

[9] Sarac, Florentina. “High and Mid-Rise Apartment Buildings are Overshadowing Low-Rises” November 2019 / YardiMatrix.