Over the course of the last 18-plus months, virtually every industry in the world has been impacted by the COVID-19 pandemic. Early in the “pandemic era” as it has come to be known, many employers responded to stay-at-home orders and other government recommendations by allowing their employees to work from home. Now, as we approach the two-year mark of this new normal, many employers are trying to strike the balance between bringing employees back into the workplace and keeping everyone on their team safe. While some employers are returning to in-person work, others have decided to continue to let their staffs continue to work from home.
While there have been countless articles written and studies conducted on the impact that remote work has on various different industries, it’s also worth noting that this “new normal” is going to impact other aspects of the economy, namely commercial real estate. The backbone of commercial real estate investing is found in the fact that businesses need to rent or purchase spaces to operate their business in. With millions of employees continuing to work from home, will commercial real estate investing continue to be a viable revenue stream? Understanding the impact of working from home on commercial real estate can help you adjust your investment strategy and reevaluate the way that you’re currently using your money.
How Prevalent is Remote Work?
According to a recent study 57.1% of American employees report that they spend at least a portion of their workweek working from home.1
Obviously, that number is telling. However, it’s worth noting that we didn’t get to that number based solely on the global pandemic that has completely reshaped the way that we do everything. Instead, the number of American members of the workforce who spend at least a portion of their week working from home has been on the incline for years. For instance, in a recent Gallup survey, 56% of workers were either “always” or “sometimes” working from home, and the percentage of employees working from home hit a high of 70% in April of 2021.
As new variants of the Coronavirus develop and spread, it seems as though the trend of allowing employees to work remotely won’t be going anywhere soon. Instead, it seems as though employers will continue to let employees work from a safe location. Not only is this option clearly safer, but there are some studies that seem to indicate that employees are equally (if not more) productive working from home as they were in traditional office spaces.3
What That Means for Investors
If you’re a real estate investor, this is a bittersweet realization. Obviously, none of us want to continue to see people face serious illness or worse stemming from the Coronavirus. However, if you depend on commercial real estate investing in order to passively generate income, you obviously don’t want to see commercial workspaces become less popular.
We should probably go ahead and dissuade some of the fears that many commercial real estate investors are facing. First of all, commercial real estate is never going to go away. There will always be a need for apartment complexes, restaurants, hotels and other types of commercial spaces will always have a place in the market.
However, office space needs are changing rapidly and supply may outpace demand. Additionally, many people are now taking advantage of fast shipping options from companies that allow them to shop from home, causing many retailers to close down their brick-and-mortar locations and convert to an online-only model.
Does this mean that there is no longer a need for office spaces? No, and we will discuss the new-look office spaces in a moment. Does it mean that there is no longer a need for retail locations? Of course not. However, both of these traditional commercial real estate examples are going to be different moving forward.
As with any industry, however, change actually creates new opportunities for real estate investors who know where and how to invest, and what to avoid. Prudent investing during a period of economic change can yield alpha and asymmetrical returns. Starpoint, as a market and product type expert, has historically developed strategies to capitalize on market inefficiencies and periods of change, leading to industry-leading returns as shown in the chart below:
What Does the Future Look Like?
Obviously, none of us know exactly how things are going to look one, three, or five years from now. However, we can look at patterns from the past and current situations to get a decent understanding of how things may go in the future.
Many office-based employers around the globe are going to a hybrid model. Instead of allowing all employees to work full-time from home, they are requiring employees to work two or three days a week from the office while working the other two or three days from home. That’s great news for commercial real estate investors, but it misses one point. Massive office spaces that once held a full staff are in less demand and seem as though they will continue to be. Many of the companies who are using a hybrid model only work a percentage of their employees each day. This allows for better distancing and easier sanitation.
For instance, some companies schedule 50% of their staff to work on site on Mondays and Tuesdays while the other 50% work Wednesdays and Thursdays and everyone works remotely on Fridays. Companies all have their own approach, but the fact remains that many businesses are now able to operate in smaller office spaces.
As an investor, you may need to consider changing the type of investments in your portfolio. Many companies are looking for smaller, more versatile spaces that lend themselves to remote work and smaller on-site staffs. As far as retail spaces go, there will always be brick-and-mortar stores. However, you may have a more difficult time finding tenants for those spaces in these uncertain economic times.
Instead, many retailers who are shifting their focus toward e-commerce need fulfillment spaces. Several retailers aren’t servicing customers who come into a physical store to make a purchase. Instead, they need a space where they can process online orders and then package and ship them out.
Commercial real estate has always been and will always a viable investment. As long as there are businesses operating, there will be a demand for commercial facilities. Understanding what type of space to invest in is key when navigating these uncertain times.