Remote working has undoubtedly had an enormous impact on the wider economy. With most companies reporting an increase in productivity with a remote working model in place, the COVID-19 pandemic will likely have far-reaching after-effects that may never be reverted.
A more productive, more flexible working day without a stressful commute is excellent news for many. However, commercial real estate companies are set to face a freefalling drop into bankruptcy if the current trend of office closures is set to continue. With huge tech companies located in San Francisco including – SalesForce with their very own tower, Google, Uber, Twitter and Facebook announcing a shift to remote working, it has investors in commercial real estate understandably worried.
The small business’s plight has prompted governments across the world to put together some kind of relief package, but what about the large commercial real estate companies?
Long term low-interest loans and the extension of PPP initiative may go some way in helping real estate companies ride the COVID-induced wave of financial uncertainty in the short term – but what will a vaccinated future have in store for the owners, shareholders and employees who work in commercial real estate?
How Will Remote Working Impact San Francisco?
As more companies adopt a remote-working operational model, being located in city-centers may not be as important moving forwards into 2021. There is a good chance that remote work may spread job opportunities across the USA. Previously, to get a high paying job, a candidate had to be willing to move to one of a handful of densely populated, affluent cities including San Francisco and Silicon Valley.
It is predicted and hoped that a more permanent shift to remote working would even-out some of the pay gaps across the country. Residents of smaller towns and less affluent states, employed remotely could help develop their local economies. Instead of having to relocate to enjoy greater career opportunities, in 2021 and beyond, it may well be possible to stay put in your home town. Mark Zuckerberg may have slammed the proverbial breaks on any significant developments; however, his announcement that salaries will be adjusted by location. This seems reasonable from individual perspectives. Someone living in the middle of San Francisco is likely to have higher living costs than a counterpart located in a more rural and sparsely populated part of the US or another country or continent with a less robust economy and currency.
According to UpWork Chief Economist Adam Ozimek, research shows that wages tend to meet in the middle. Businesses don’t have to pay as much in wages as they would when recruiting everyone from the local labor market. The employees in suburban or rural areas often get paid more than they would if they worked locally.
The giant San Francisco and San Jose metro areas income/house price ratio is astronomical compared to other areas of the country. For people looking to work for high tech, well-established companies, who also want the opportunity to buy a property, the remote working model may be the answer. Outsourcing to different areas and overseas might be a trend to keep an eye out for in 2021. It is also likely that virtual assistants, phone answering services and freelancers may find themselves in demand – now that the remote working infrastructure is in place.
How Will Real Estate Industry Recover?
The COVID pandemic has been “a very challenging time” according to Mark Carlson, Managing Director and Partner at Stockbridge in his recent interview with KTVU on Youtube.
With tenants experiencing a complete loss of income during the pandemic, it was a challenge to keep everyone in the business, including the property owners and the tenants both commercial and non-commercial. The value of many commercial properties has been cut in half according to some reports. In some areas, the occupancy levels have been slashed from 80-90% – which is not sustainable for landlords.
Remote working continues to make a devastating impact on chains such as Marriot Hotels. They are no longer benefiting from travelling businessmen and businesswomen or those on vacation.
With hotels in Union Square reported being boarded up in the summer of 2020, the fall of commercial realtors’ prosperity in major city centers is like nothing ever seen before.
Retail has also been hit hard, with people choosing to buy mainly online. The future of retail has been going through a cyclical shift even before COVID-19. With the increase of eCommerce sites and people purchase everything online, including groceries, clothes and furniture, it has been impacted the retail sector for a long time. A decade ago, retail real estate was the lower risk investment with larger reliable tenants occupying major city centers.
In recent years, even major companies have gone out of business, and retail real estate has often been replaced with gyms and restaurants. Unfortunately for the occupants and the property owners, gyms and restaurants have not escaped the sweeping damage caused by COVID. Many of these businesses have also closed, or are open but with reduced occupancy. Reduced occupancy, means, reduced income and reduced ability to pay overheads such as rent.
Industrial Real Estate May Benefit
COVID-19 may have accelerated the transition to retail online and industrial sites may be the winner in the real estate sector during and after COVID. As more people shop online, industrial units’ vacancy rates have been above 97% in the Bay area. With more people buying online during the pandemic, including the elderly, post-COVID retail may lose out while industrial real estate may continue to grow.
More Space Required?
There is a chance that if social distancing becomes a standard practice in office environments, that tenants will need even more space than they did pre-COVID.
The effectiveness of a vaccine may determine how much social distancing becomes standard practice in the future. For example, with the Oxford vaccine, reportedly 70% effective – would a 30% chance of transmission allow people to feel comfortable sitting right next to each other once again?
Another possibility is that people will come back into work, with the same spacing in terms of seating arrangements, but on a rotation. For example, say ten people used to sit around a desk in an office, it could be that on Monday and Tuesday, five people work from home. Five others work from the office, and this rotates on Wednesdays and Thursdays, and everyone works remotely on a Friday.
Whatever happens in 2021, it will be interesting! Will people feel the need to get back to the office once it becomes an option? How important is a sense of community and camaraderie? It seems likely that most companies will adopt a hybrid model of work, with the option to work remotely for several days per week. Hopefully, this hybrid model will be enough to breathe new life back into the commercial real estate sector in San Francisco and other areas that during pre-COVID were flying high but are currently on their knees.