The Permanent Shift To Remote Work Could Create A Race To The Bottom For Office
As a host of companies have started pushing their employees to work remotely, they will soon begin to show positive impacts on their balance sheets, saving not just in rent but in energy consumption and office supplies. The relative financial advantage could kick off a race to the bottom in office costs that could have sweeping impacts on the real estate market.
Already, a number of public companies are telling stock analysts that there will be sweeping reductions in office space use, which could save them millions of dollars. And these early adapters will create a Keeping-Up-With-The-Joneses race among companies, CFO Leadership Council founder Jack McCullough said.
“That's definitely going to happen,” McCullough said. “Even if a company doesn't want to — and in the short run, they can get away with it for a couple of years — their competition is going to be outperforming a little bit because they'll be saving on the real estate costs.”
The work-from-home movement, which will allow companies to realize millions of dollars of savings annually, may eventually find employees pushing back against remote work policies, especially as some employees begin to shoulder expenses and costs that ordinarily would have been paid by their employers.
These costs were invisible to them before, but the more they work from home, employees will start to notice things like increased utility bills as people use more electricity, heating, air and water during the day, Avison Young principal Gail Crowder said.
“You can argue that this is balanced by a trade-off in money not spent eating meals at restaurants during the week, buying more gas or tires for your car, or spending money on public transportation costs,” Crowder, a leasing broker who represents tenants like MassMutual and Wells Fargo, wrote in an email. “But for many people, the trade-offs may not be enough to balance the budget."
What began with just a handful of tech companies announcing plans to allow employees to work from home forever — Microsoft and Facebook being two of the largest to declare early — has become a cascade.
Over the past few weeks, executives from a number of publicly traded companies have told analysts about plans to keep employees working remotely or using flex space and downsizing office footprints. Executives from aerospace giant Boeing and engineering firm Tetra Tech said in recent months their companies would look to cut their office space by roughly 30%.
Defense contractor Raytheon Technologies CEO Greg Hayes said last week that the company plans to slash more than 20% of the 31M SF of office it uses worldwide over the next five years, with employees working both in the office and remotely.
“These last six months, as I've toured the country and visited facilities where we've got literally a handful of folks working there and everybody else is being efficient working remotely, it became very apparent. We don't need all the space,” Hayes said during his company's Q3 earnings call. “And I think the ability to work remotely with the technology that we have without losing productivity is essential in our go-forward plan.”
A September survey by the corporate real estate organization CoreNet Global found that 75% of its members expected their corporate real estate footprint to shrink over the next year. A lot of that reduction will be fueled by remote working and work-from-home policies, CoreNet Senior Vice President Tim Venable said.
“Now that the genie is out of the bottle, it's going to be hard to put it back,” Venable said.
For some companies, the driver for this is due to what executives see as a successful transition to working from home during the coronavirus pandemic. In a post-pandemic world, employees will be spending 42% of their workweek in a home-based office or remote location, according to the CoreNet survey. Respondents said employees would spend half their time in traditional offices, while another 7% would report to coworking spaces.
“A lot of our people are very comfortable working from home,” Toronto-based Rogers Communications CEO Joe Natale said during his company's Oct. 22 earnings call. “I think that 100% work-from-home in perpetuity is not the right answer for our organization. However, there are many people that enjoy the benefit of supporting our customers through our care operations working from home. And there, we already had roughly 800 agents working from home permanently before COVID.”
International executive placement firm Heidrick & Struggles will be pursuing a hybrid work plan moving forward that includes work-from-home and hoteling at an office location, CEO Krishnan Rajagopalan said.
“We'll be publishing our remote policy for next year, and there are people who will elect to work remotely as a result of that policy as well. We will respect that,” Rajagopalan said on his company's earnings call last week.
Surveys have shown that working from home also is popular with employees. More than 50% of 25,000 workers polled by an IBM survey said they prefer working from home, and Gallup reported that more than 50% of workers would switch to jobs that offered work-from-home options.
But despite employee desires, the corporate motivation to reduce office space will likely be driven by costs.
“A large part of it is simply cost reductions,” McCullough said. "In an economic slowdown, it’s always wise to cut expenses."
“There is that savings on the space and the utilities,” said Society Of Human Resources Management Policy Director Amber Clayton. "Given the research that one of four are thinking about letting their employees work from home on a permanent basis, I suspect there are companies thinking about closing their offices.”
That is already happening, particularly in the newspaper business, with daily papers like the New York Daily News and Orlando Sentinel closing their newsrooms. Mining company Freeport-McMoRan is considering ditching its 850-person headquarters in Phoenix, The Wall Street Journal reports.
For some companies, the cost savings of remote work doesn't dissuade them from needing traditional office space.
“I worry more about the downsides of managing corporate culture or the conversations that don’t happen,” First Horizon Financial CEO Brian Jordan said during an earnings call last month. “How do you mentor people? How do you develop people? And I think, while we could go cut out a lot of office space and do things remotely, because we’ve proven with technology that it works, you really have a hard time as you say, maintaining corporate culture in a two-dimensional framework of a WebEx or a Zoom conference call. So, it’s something that we are clearly paying attention to.”
ABM Industries CEO Scott Salmirs said on a Sept. 9 earnings call that the pandemic is actually prompting him to be more bullish about the need for corporate office space.
“I’m not sure how you create a strong company with a distributed management team. It doesn’t make sense to me,” Salmirs said. “Who is going to be bringing people back? It’s really the Class-A tenants. The Class-A office buildings that have better air systems, that invest in technology and have more robust cleaning specs because of their financial wherewithal.”
But as the companies with more aggressive work-from-home policies begin to show bottom-line benefits from the move, other companies will rush to catch up, said Brian Bailey, a commercial real estate expert with the Federal Reserve Bank of Atlanta.
“I think we also have to be aware that there's an ability by the employer to push some of the employee costs ... onto the employee,” Bailey said during a webinar hosted by the Florida Alternative Investment Association on Oct. 20. “For instance, we're all shouldering, if you're working from home, the electricity bill, more water. Certainly, that benefits [companies'] bottom lines.”
Some companies are reimbursing employees for an increase in at-home expenses, according to CoreNet. In its survey, 17% of respondents said their companies were providing $100 to $250 in reimbursement costs, with another 17% offering up to $500. Nineteen percent are offering assistance “on an as-needed basis,” CoreNet found, while 34% said they weren't providing any financial help for home office setup.
“Most employees are expected to have access to the internet, and those costs are typically falling on the shoulders of the employees, except in a few cases where companies are paying a stipend to employees who were hired to physically work in the office,” Crowder said.
The pressure to do so may mount over time, especially as more full-time employees learn that they are no longer allowed to deduct home office expenses on their taxes, a long-time perk that was eliminated in 2018 with the passage of The Tax Cuts and Jobs Act in 2017, Wiggam & Geer partner Alyssa Maloof Whatley said.
“It was abused so much. That's why I think it was removed,” Whatley said. “It is a big change, and a lot of people were upset in 2018 when that line item wasn't there.”
Already, some companies are feeling the obligation and pressure by employees shuffled off to their homes to work on some of these costs, McCullough said. The deeper the shift away from the office embeds within corporate America, the more those pressures are likely to mount on the C-suite.
“Most everyone would agree that laptops should be provided by the company, office furniture and maybe some other equipment. But I am hearing stories that people want a snack and coffee allowance because they used to be free and now they have to pay for them,” McCullough said. “Others are discussing heating and air conditioning costs. It raises some interesting issues CFOs have never had to think about before, and the answers aren't obvious.”