What Companies’ Tech Spending Says About Future Demand for Commercial Office Spaces

High-rise buildings in downtown San Diego. Photo by Chris Jennewein

As the U.S. economy re-opens, increased corporate spending on video systems and plans to increase shared workspace suggest hybrid work will remain, potentially hurting commercial property prices in San Diego and other major cities.

After the jump in the wake of the pandemic, sales of remote work facilitation technology continue to rise.

Retail sales of USB cameras and computer microphones rose 77% and 36%, respectively, from March to May compared to the same period last year, after doubling from those months in 2019, according to market research firm NPD Group.

Computer goods maker Logitech International SA announced earlier this year that sales of webcams and cloud-based video collaboration devices will continue to remain strong in 2021, after tripling to $ 1.48 billion in the twelve months to March.

And a survey by Morgan Stanley showed that the majority of companies plan to expand the shared workplace as they try to cut down on expensive real estate.

“Executives in many companies would like everyone back, but technology spending plans show they recognize the need for a flexible workplace,” said Vikram Malhotra, real estate analyst at Morgan Stanley.

The rise of the hybrid office is creating headwinds for job demand in cities like New York and San Francisco, where few large office buildings have been sold in recent months. The institutional portfolio of office properties in the two cities is estimated at $ 231 billion and $ 128 billion, respectively, according to LaSalle Investment Management.

While rental activity has rebounded from the pandemic lows, rental rates are weak and vacancy rates remain high, weighing on the value of office buildings and hampering transaction activity.

Total revenue from office real estate in Manhattan, for example, fell more than half last year to $ 5.4 billion and was only $ 41.9 million in the first quarter of 2021, according to Cushman & Wakefield Plc.

The homework trend will weaken landlords’ pricing power on leases and the returns investors expect from office real estate, Malhotra said. The bank estimates the changes will reduce US office space by about 13%.

Green Street, a real estate consultancy, predicted in June that remote working could hurt office demand by about 15%.

“The prices in these major global gateway cities – New York, San Francisco – are the showcase, they are soft,” said Mark Zandi, chief economist at Moody’s Analytics.

Many companies plan to allow at least some remote working, including Swiss bank UBS Group, which announced plans for a largely hybrid workforce earlier this week.

Other companies, including Goldman Sachs Group Inc and Morgan Stanley, have resisted creating a hybrid workplace.

At Cerner Corp, a US healthcare technology company, 75% of its 27,000 employees could be “dynamic” and work remotely half the time, said Tracy Platt, Cerner’s chief human resources officer.

“We want to get the best of both worlds and are confident that we can do that with this model,” she said.

Not everyone believes that hybrid work will shrink offices or remain attractive over the long term. Most employees will likely work three to four days a week, making land consolidation difficult, said Alex Goldfarb, an analyst at Piper Sandler.

At the same time, “people want to be seen as part of the game, and there’s no game out there that you can win if you’re not on the field,” he said.

Still, the pandemic has accelerated changes that have been underway for some time. Vocon, an architecture firm, designed offices before the pandemic in which 20% of employees were employed at so-called hot desks, where several employees use a single physical workstation at different times. Now, according to Vocon, some customers are allocating more than 40% for shared storage.

“Does it make sense to come to a certain place every day? In some cases, it didn’t make sense before the pandemic, ”said Deb Donley, owner and director of Vocon.

The demand for office space does not have to collapse in order to have a negative impact on occupancy, rents and values, wrote the analysts from LaSalle. A 5 to 10% drop in demand could lead to increased vacancies and delay the sector’s recovery by five or ten years, said the unit of Jones Lang LaSalle Inc.

LaSalle underweighted its exposure to office buildings long before the pandemic, said Rich Kleinman, LaSalle’s co-chief investment officer for America.

“A lot of people haven’t really estimated how much capital will be needed in the long run to own an office building,” Kleinman said. “The risk-return ratio is not as attractive as with some other types of property.”

(Reporting by Herbert Lash in New York; Editing by Megan Davies, Ira Iosebashvili and Matthew Lewis)

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