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Analysis: what business’ tech spending means for future of CRE office space

The COVID-19 pandemic has left many wondering about the commercial real estate office market’s future as businesses across the United States turned to remote work in March 2020. Although no one can predict what lies ahead for the office CRE market for sure, monitoring companies’ tech spending could be a good indicator of where things are headed, according to a recent Reuters report.

Corporate spending on video systems has increased, while plans to bolster shared workspaces could be signs that at the very least businesses will use a hybrid work model as offices reopen. Although the pandemic is subsiding, technology sales for equipment used to accommodate remote work continue to trend higher, Reuters reports. USB camera and computer microphone sales increased 77% and 36%, respectively from March to May from the same period in 2020. Those figures are double what they were during those same months in 2019, per market research firm NPD Group.

Meanwhile, computer goods manufacturer Logitech International SA predicted earlier this year that webcam and cloud-based video collaboration equipment sales would remain strong this year. Sales tripled to $1.48 billion in the 12 months ended in March from a year before.

The pandemic’s impact on office CRE

Technology sales are not the only indicator that the office CRE market could be changed for the foreseeable future. How companies are designing their offices is another sign that the standard five days a week in the office format could become less common. A recent Morgan Stanley survey revealed that a majority of businesses plan to increase shared workspace in an effort to bring down their real estate costs.

“Executives at many corporations would like everyone back, but technology spending plans tell you they recognize the need for a flexible workspace,” Vikram Malhotra, a real estate analyst at Morgan Stanley said.

Increased hybrid offices could impact workspace demand in major cities like New York and San Francisco. There have been fewer prominent office building sales in recent months, Reuters reports. Institutional office asset holdings in the cities are currently valued at $231 billion (New York) and $128 billion (San Francisco), according to LaSalle Investment Management.

Meanwhile rental prices remain low, while vacancy rates are still high, which negatively impacts CRE office buildings’ value and makes it difficult to make deals. The total sales of office properties in Manhattan fell by more than half to $5.4 billion in 2020, according to Cushman & Wakefield. During the first quarter of this year, office property sales totaled just $41.9 million.

As long as the work from home trend continues, landlords will see the pricing power they have on leases, as well as the returns investors expect from office assets, to diminish, Malhotra said. Morgan Stanley forecasts that the shift will decrease the amount of U.S. office space to approximately 13%. Real estate advisory firm Green Street said in June that telework could negatively impact CRE office demand by 15%.

“Prices in those big global gateway cities—New York, San Francisco—they are the poster child, they’re soft,” said Mark Zandi, chief economist at Moody’s Analytics.

Businesses’ return to the office plans

A lot of companies plan to permit at least some remote work, such as Swiss bank UBS Group, Reuters reports. The company recently announced its plans for a predominately hybrid workforce. Other businesses like Goldman Sachs and Morgan Stanley prefer to have their staffs back in the office full-time. U.S. healthcare technology company Cerner Corp. said 75% of its 27,000 employees could be “dynamic” and telework half of the time.

“We want to get the best of both worlds and we’re confident we can through this model,” Cerner Chief Human Resources officer Tracy Platt said.

There are others who don’t believe the hybrid model will reduce office space or be the preferred method long term, however. Piper Sandler analyst Alex Goldfarb said that most employees will likely work at the office three to four days a week, which will make space consolidation harder to do.

“People want to be seen as though they’re part of the game, and there’s not a game out there that you can win if you’re not on the field,” he said.

There’s no denying that the COVID-19 pandemic accelerated office changes that were a long time coming. Architecture firm Vocon had designed offices that saw 20% of its employees working at “hot desks” before the pandemic. These workspaces are meant for multiple workers to use a single physical workstation at different times. The firm now says some clients are allocating more than 40% for shared spaces.

“Does it make sense to require people to come to a certain specific location every day?” Vocon owner and principal Deb Donely said. “In some cases, it didn’t make sense before the pandemic.”

LaSalle analysts also noted CRE office space demand doesn’t have to drop dramatically to impact occupancy, rent and property values. Just a 5 to 10% drop in demand could increase vacancy rate and delay the sector’s recovery five or 10 years. LaSalle has been ahead of the trend and had cut back its exposure to office buildings prior to the COVID-19 pandemic, Rich Kleiman, company Co-Chief Investment Officer of the Americas, told Reuters.

“Many people have not been accurately assessing the amount of capital that’s needed over the long term to own an office building,” he said. “It’s not as attractive of a risk-return proposition as some other property types.”

Joe Dyton can be reached at joed@fifthgenmedia.com.

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