Property insights by John Loos, Property Sector Strategist at FNB Commercial Property Finance
Across the planet, many employers of office workers are trying to grapple with their approach regarding the long-term trend towards greater working from home (WFH) and working from anywhere (WFA). Some are resisting, and some are embracing it. But in the end, the market will have the final say.
Market forces are powerful, and many companies and Governments alike have come off second best when trying to resist those forces. The labour market is one such market, and office employment conditions and arrangements are part of that market.
The Work-From-Home (WFH) debate escalated almost 2 years ago, ever since Covid-19-related hard lockdowns started across the world in early-2020, with many office workers being sent home to continue working.
Ever since then, there appears to have been a proliferation of research done on the issue, perhaps less so in a developing country such as South Africa, but very much so in developed countries such as the US and UK to name but two.
But as yet, I don’t think any of us are quite clear on how the future looks for the office worker and the office market, or how rapidly the long-term rising WFH trend proceeds from here. The myriad of WFH surveys have proven interesting and insightful, albeit often varying in outcome, and although often done in developed economies, I suspect the results can often be a reflection of what many South African employees and management members are also thinking about WFH, the good and the bad
Having read many articles on WFH survey results and expert opinions, I come away with the impression that regular employees in sectors such as the Financial Sector tend more towards wanting to work from home, while members of management as a group are biased more towards getting their subordinates back to the office.
This segmentation between management and regular “workers” may be a bit too simplistic though. Yes, it is perhaps true that many managers feel uneasy about WFH, because all their lives many may have (perhaps incorrectly at times) equated work and productivity with being able to see a worker at their desk peering at a computer screen. There is such a mindset amongst some, although they would battle to explain some impressive company results over the past 2 years where often almost entire work forces worked remotely.
But as far back as 2013, Nicholas Bloom and James Liang published the results of their work with CTrip, a large Chinese travel agency, where they conducted a randomized experiment comparing the output and productivity of 2 selected groups, one working from the office and the other group sent home to work. The paper was titled “Does Working From Home Work? Evidence from a Chinese Experiment (NBER Working Paper No. 18871), The results were encouraging for those who believe that greater levels of WFH can work, and challenged the notion that employees need to all be in the office to be at their productive best.
There have been different segmentations provided too, when analyzing the WFH issue. One theory I’ve come across has been that the “hard workers”, those who want to get the job done without distraction, tend more towards WFH (I’m guessing those who don’t have a distractive home environment at least), whereas the so-called “political players”, or “networkers”, in the companies we work in are desperate to get back to “old normal” with everyone back in the building, because those networking and lobbying interactions are better done informally in corridors or cafeterias face to face.
Some may see the WFH set up as more popular amongst introverts, while many extroverts perhaps long to walk the corridors again, interacting with many people in person.
And while some CEOs talk about the importance of maintaining “company culture” as a reason for bringing employees back to the office, not all companies seem to have a company culture that excites employees and motivates them to voluntarily rush back to the office in their droves. Some surveys have even suggested that the “out” crowd feel more comfortable working from home than the “in crowd” in the office.
Besides general company culture arguments put forward by the pro-office work group, I have also frequently read and heard the arguments that activities such as idle banter and “coffee machine conversations” lead to all sorts of innovation, good ideas and problem solving for the betterment of the organization.
There is probably some merit in these arguments advanced by the “back to the office” grouping. Despite huge improvements in conferencing software, I don’t believe we have yet fully replicated the in-person interaction experience online.
So, what do we know about the most recent WFH/Back to Office state of affairs?
As people linked to the Office Sectors take sides in the debate, many of us can be guilty of reading what we want to read in the media on the issue and what research we want to believe, and news headlines often play to the crowd. Just last week I read an article from the Harvard Business Review titled “Why Companies Aren’t Cutting Back on Office Space”. This would surely grab the attention of office landlords and certain “pro-back to the office” managers.
There is some truth in this report, which emphasizes that social distancing measure often drive lower office worker density levels. But its headline is perhaps misleading, because while greater social distancing in the office can mean lower density than before for many, curbing by how much a company can reduce its office space requirements, such a claim that companies have not been cutting back on office space may seem a little strange to some in a country such as the US where we know that office vacancy rate have risen quite significantly in many cities. And in South Africa too, MSCI data for South Africa shows the national office vacancy rates having risen from 7.9% as at the 2nd half of 2015 to 17.9% by the 1st half of 2021.
There are indeed often other reasons for a decline in office space demand, such as a company either closing down or scaling back on its staff, normal recession events that have been happened periodically long before WFH took the world by storm.
But in FNB’s Property Broker Surveys, a very significant percentage of brokers, who are very much in touch with landlords and tenants in the office market, have been consistently pointing to companies revising their office requirements, and often cutting back on space, with greater levels of remote work being said to be a key driver of this.
And in the few head offices that I’ve been into in recent weeks in Johannesburg, it would appear that where management have not instructed employees to be physically present in the office, there has not been a massive rush to voluntarily return to the office. But this is my experience, and not a big enough sample to be statistically meaningful.
So how do I take a stab at the future view of office space, with so much apparent uncertainly and divergence in views? Well, I try to look past the noise of what individuals in a market say at any given time, and prefer to consider what the greater market forces, driven by larger groupings, will ultimately do.
Importantly, the rising WFH trend is a very old one.
Let’s first remind ourselves that the trend towards increased WFH (or work from anywhere other than one’s office) did not start 2 years ago with the onset of lockdowns. It started a few decades ago driven by forces totally unrelated to lockdowns.
Well before the 2020 lockdown, The US Census Bureau had shown estimates of the percentage of employees working from home has risen gradually from 3.3% as of the year 2000 to 5.4% by 2018.
Such a rising trend over decades is not at all surprising, given that technological progress has made many employees in the office sector increasingly mobile. Just thinking back to what working life must have been like in the 1970s, I would imagine that it was difficult to do any work if one wasn’t near to your big document filing cabinets, filing rooms, and libraries within your office building. Then, as time went by, came the personal computer, then the more mobile laptop, the internet and logging into servers, email, wifi, and now highly affordable and practical conferencing software enabling us to “Zoomify” much of our interaction.
There is little doubt that ongoing technological progress over recent decades has been making many office working employees, for instance in the financial sector, increasingly mobile i.e., increasingly able to perform their roles from remote locations often far removed from their offices.
So that has been the long-term trend in sectors where remote work is possible, and I believe that we should work on the realistic assumption that the enabling technology continues to improve for the foreseeable future.
The Covid-19 lockdown period has merely boosted the long-term WFH trend.
Next, what did the 2020 hard lockdowns do? Well, while the technology was available long before lockdowns, we know that many people only adopt such technology with a long time lag, often a very long time lag, while some will never adopt it if not forced to do so. These are the so-called late adopters.
Lockdowns forced late-adopters to use the most modern online meeting technology
Crucially, the lockdowns forced the “late adopters” (a large number of us) onto this state of the art communication technology, and I believe that many were pleasantly surprised (or even alarmed perhaps) at how effectively it worked. Whole divisions of banks have functioned almost entirely remotely for 2 years with relatively few glitches. The forced lockdown “experiment” has been a massive success albeit not perfect, although I won’t deny the benefits of some in-person contact either.
Lockdowns made online meeting interaction far more acceptable.
Equally important, the lockdown period has also served to make remote interaction acceptable in corporate environments. One of the major limitations to work location flexibility for those of us who wanted to use conferencing software prior to the lockdown era, in order to avoid costly and time-wasting travel, was that we were often disallowed from doing so because physical meetings were “just the way things were done”. And so, even those of us who wanted to modernize ended up commuting to in-person meetings much of the time
That has changed, and online meetings are widely acceptable practice even amongst the late adopters. I believe that this forced attitude change is highly significant in increasing work location flexibility
And this greater acceptance of online interaction, I believe, is here to stay at a far higher level than prior to lockdown, implying far less of a need to be in the office for in-person interaction.
Lockdowns have made many employees realize just how bad and costly daily office commuting was
In addition, I have often seen how humans don’t really appreciate how bad something is until they stop doing it. We get used to things over many years, and I believe society’s becoming accustomed to the costly, stressful, and time-wasting activity of urban commuting (not to mention polluting as well) has been similar to the “frog in the boiling pot” analogy that is often used. There is little positive about urban commuting in increasingly congested cities.
The lockdowns suddenly forced many of us to try a life free of that commuting. We had more hours in the day to use productively, less stress from the commute, and for many people a major financial improvement through a drop in transport costs.
I believe that this sudden realization as to how bad daily office commuting actually is has been a key influence in the desire of many not to return to the office itself. It isn’t all about the office environment necessarily being bad. It's often about the dismal experience of getting to and from the office.
So what happens next?
So what happens in 2022? Barring the emergence of some far more lethal strain of Covid-19, it would appear that South Africa, and the world, are set to get back to far more “normal” economic life, relatively unrestricted by lockdown regulations.
Going from “abnormal” restrictions back to freedoms resembling pre-Covid-19 days, I would expect many office employees to return to the office full-time or part-time. However, given what lockdown has done to show many people what they’ve been missing out on over the years through commuting to offices, and given that certain companies will see cost-saving opportunities, I would not expect the level of office attendance to get back to where it was prior to 2020 lockdowns. Why?
- Firstly, the widespread acceptance of remote interaction as an alternative means that more of us that have always wanted to use it can use it.
- Secondly, I believe that even many late adopters may have been pleasantly surprised at how well the forced WFH “experiment” has worked.
- Thirdly, the time-saving in commuting costs when working remotely can for many employees be massive, up to a few hours per day.
- Fourth, there are significant potential financial cost savings, transport-wise for commuters
- And fifth, there are potential office space cost savings for companies themselves, and “money talks”.
And what happens after the partial “back to the office” drive?
After the “return to office” post-lockdown “normalization”, how do things likely progress from there? I believe that the market will start to talk and the longer-term rising WFH and WFA trends will resume.
Let’s ignore the myriad of reasons as to why office employees desire to work from home or the office, or why management wants them back or doesn’t. The reality seems to be that many employees desire flexibility in this regard, and a significant portion appears to want to work remotely where the job can be done remotely.
A recent Vidyard/Atomik survey of a sample of Financial Sector employees in North America was quite astounding to me. In the responses, only 1% said that they would prefer to work in the office all of the time, and 5% of respondents would prefer to work in the office some of the time. 96% of respondents said they would give up a part of their salary in order to be able to work from home permanently. These results appear to be extreme, and other survey results differ in magnitudes, but for a sizeable portion of employees, flexibility in work location, and being allowed to work remotely at least for a significant part of the time, appears to be proving popular.
The Market begins to dictate
In any market, there are players with divergent views on how to play in that market. Some will “get it right” and others won’t, with regard to the future direction in which the more powerful market forces take them.
If surveys to this effect are a reasonable reflection of the opinions of the workforce, certainly more “progressive” employers will see a potential opportunity to eat the more “resistant ones” lunch. The apparent opportunity lies in being able to attract skilled employees to your organization through offering greater flexibility in working arrangements, while also perhaps being able to contain the company salary bill through being able to offer lower salary packages (than in an inflexible approach scenario) accompanied by greater work flexibility. Then, on top of that, the company could conceivably contain office space costs too, retaining less office space than would have been the case in a less flexible work arrangement scenario.
What happens next? The less flexible employers would then likely be pressured by the market into greater flexibility with regard to working arrangements.
In short, I would expect the longer-term multi-decade trend towards greater work from home, or work from anywhere, to continue. This is what has been happening over the past few decades as technology makes a certain group of employees’ mobility ever greater. So, after some normalization of office work activity following a lockdown WFH “spike”, I would expect the longer-term rising trend to resume.
For many, it won’t be full-time WFH, but part-time WFH to a greater degree than prior to lockdown. And with even the office-bound employees spending far less of their workweek in the office, reserving a desk permanently for each employee makes less and less sense. Enter the “hoteling” of desk space for many companies, where employees only reserve desks for the days that they will be in the office. I expect this practice to offset the move to a lower density of staff due to social distancing measures.
Accompanying all of this, I would anticipate that the Office Market will continue its long-term trend towards occupying a smaller share of total property stock. In the 5-year period up to the year 1990, square meterage of office space built amounted to 34.6% of total stock built in the 3 major Commercial Property Sectors (Office, Retail and Industrial). In the 5-years to 2021, this share of the total had already shrunk to 22.1%.
