The past few years have seen a seismic transition from in-office work to at-home work. Now, we are seeing a transition back to more in-office work. Still, it seems that work-from-home (WFH) will play some part in our working lives for a long time to come.
Surveys show that most workers (over 75%) would sacrifice pay for the flexibility of WFH. Those who work in commercial real estate are likely wondering how WFH has affected property values.
Supply and demand effects
For the commercial real estate industry, the biggest concern about WFH is that it reduces the need for office space, which would negatively impact property values. The truth is, at least according to Columbia Business School, that commercial real estate and downtown housing have reduced in value. The projected drop is predicted to be between 12% and 25%. This affects everyone, as the property tax revenue will be reduced, as will the customer base, which will have negative effects on surrounding businesses.
Not all office properties are equally affected by WFH. For those Class A properties in prime locations, their prestige and amenities will attract new tenants. However, these tenants may choose the most prestigious urban markets at the expense of secondary and tertiary markets. Even Class A properties may need to increase their amenities to attract these tenants.
Mitigating WFH impacts
Commercial real estate investors and owners can mitigate WFH impacts in a variety of ways. One way is to ensure they have a mix of tenants with a focus on industries that are conducive to WFH. A diverse tenant mix can have a huge impact on ensuring robust rents and maintaining rent levels. These industries include education, healthcare and more..
Another way is to be flexible with lease terms and structures. Properties that offer flexible lease terms could attract a broader range of tenants, which would give them an advantage over rigid, traditional and long-term leases that have high penalties and restrictions.
Finally, depending on the location and the infrastructure of the building, some commercial real estate investors and owners are repurposing or redeveloping underutilized spaces. This could be to repurpose underutilized spaces into amenity spaces, small business laboratories, etc. This can also be bigger redevelopment efforts, like making the property mixed-use by adding residential space, or hospitality businesses, retail or industrial.
The key here is that investors and owners need to take WFH seriously as it is not going away. But, for those that can adapt, they may find themselves in a much better position now and in the future.