Janus Henderson Investors: Office isn’t the next retail

Key takeaway

• With social distancing requirements and the heightened aversion of being too close to colleagues there is an argument that more office space per employee could be required.
• The impact on the office sector is likely to be more negative for older and lower-quality buildings that are less able to adapt to the evolving requirements of tenants.

Right now, you may be reading this while working from home. How’s it going?

The answer is probably mixed. On the one hand enjoying the time saved from commuting, perhaps fewer distractions from co‑workers (but more from the kids) and for some, even fewer meetings. But on the other hand, perhaps you're actually logging more work hours per day, not being as productive as you were before, and communicating less with your colleagues, resulting in an increase in stress and anxiety levels?

Indeed, well-being issues have been raised as a key concern for people working from home. In the US, a recent survey by USA Today and LinkedIn found that 51% of respondents felt lonely working from home with 20% feeling lonely all, or most of the time. Maintaining employee morale has proved difficult, according to two-thirds of human resource professionals surveyed by the US-based Society for Human Resource Management.

Whatever your experience of working from home has been, it has shown that most office‑based employees can, by and large, work from home.

How will more of us working from home impact the office market?

In the midst of a global downturn, companies may look to reduce costs, with office rents often easy targets. If employees can continue to operate as efficiently at home as in the office, then no doubt some businesses will rethink their office space needs. We have some sympathy for this point of view but think the impact on office demand, may not be as bad as it first appears and therefore think that direct comparisons with the troubled retail sector are not justified.

Working from home is not a new idea. Clearly some of those people whose jobs allow them to work effectively from home were doing so prior to COVID-19. So, there must be reasons to explain why some people choose not to work from home, even though they can.

Human beings are social creatures by nature. Research by Stanford economist Nicolas Bloom has shown that in-person collaboration is necessary for creativity and innovation, which is more likely to happen with face-to-face meetings where new ideas are often developed. “[The current situation] will create a productivity disaster for firms”, says Bloom. ¹

And it's not just the creative and collaborative environment which is important: the physical environment also matters.

Many people's homes are not equipped to double up as office space. Working out of bedrooms, hallways and garages with vacuum cleaners and children as background noise may be fine in the short term but the novelty could soon wear off. As a work-around solution many have adapted to the new norm, but does working from home full time allow people to do their jobs as well as they did before, while maintaining job satisfaction and a work/life balance?

What changes to the working environment can be expected?

Over the last few decades you may have noticed personal office spaces getter smaller due to ‘efficiency enhancements’. With social distancing requirements and the heightened aversion of being too close to colleagues there is an argument that more office space per employee could be required. At the least, we believe the steady march downward in terms of office space per person may have ended  ̶  a positive for office landlords.

While this remains to be seen we think the impact will be more negative for older and lower-quality buildings that are less able to efficiently move more groups of fewer people around the building while providing a healthy and adaptable work environment. All of a sudden, the number of elevators per person and quality of heating, ventilation and air conditioning (HVAC) systems may be as important a consideration as location. Not the ‘beginning of the end.’

While difficult to predict, we think overall the impact on the office market will likely be negative in the coming months.  The key question is to what degree and for how long? Choosing the optimal working arrangement for employees is crucial not only for companies to maximise productivity but also to attract and retain the best talent via employee happiness and engagement. While current circumstances may provide a short-term pause around office leasing fundamentals, we do not believe competition from couches and kitchen tables represents a longer-term ‘beginning of the end’ for the asset class. Technology has proved to be a great enabler of change and what this working from home experiment has shown us is that you can work from home, but do you want to work from home indefinitely?


¹ Source: Stanford News, 30 March 2020. Adam Gorlick: The Productivity pitfalls of working from home in the age of COVID-19.