Do You Really Need All that Office Space?

Even as vaccination rates grow, companies remain uncertain about when, how — and in some cases, if — workers will return to their pre-Covid office routines.

Data from Google shows that workplace activity in London, New York, and San Francisco is running at half what it was before the pandemic.

A June survey by the London Chamber of Commerce of 520 business leaders revealed that among companies whose employees can work from home, half expect workers to remain remote five days per week even post-Covid.

When Apple CEO Tim Cook announced plans for employees to return to the office three days per week beginning in the fall, employees sent him a petition saying the company had “actively ignored” many employees’ desire to continue with a full-time remote regimen. It read in part: “The last year has felt like we have truly been able to do the best work of our lives for the first time, unconstrained by the challenges that daily commutes to offices and in-person co-located offices themselves inevitably compose.”

For companies that opt to require fewer employees to be on-site each day, one question looms: Should managers make the long-term decision to jettison a portion of their office space?

Based on our decades of professional experience — one of us is a London-based professor of finance and urban planning, the other is an investment manager who focuses on real estate — we believe that for many companies, the answer should be yes.

There are already signs of this shift. In New York City, for example, office vacancy rates have risen 11.3% in the last year, and now stand at the highest level in 27 years. That’s true even though New York-based firms such as JPMorgan Chase and Goldman Sachs have been some of the most outspoken about getting workers to return to offices quickly.

Why Have an Office?

Economists argue that firms prefer to have their employees work in the same place at the same time for two reasons.

First, it makes it easier to monitor workers. This claim is supported by a lot of reliable evidence, especially for salaried employees (programmers, accountants etc.), whose effort is difficult to measure. While electronic methods of monitoring work were popular even before the pandemic, skilled work is difficult to monitor in this way. If a business (or even certain managers within a company) rely on proximity and actual observation to determine who’s working hard, it will be more challenging to move its core activities out of an office.

The second reason for companies to have offices is to support unstructured exchanges of ideas. Although this is a well-established notion, there is very little evidence to support the claim that watercooler talk encourages creativity. While research shows that unstructured interactions help people exchange information and build networks, no studies show that this increases productivity of their company. The desire for unstructured exchanges should not hold anyone back from leaving their office if their primary concern is productivity. However, if informal meetings are an important part of the company culture, remote work can undermine it. Therefore, managers need to think carefully about what role informal interaction plays in their team and how work from home will affect it.

These two reasons for having offices — supervision and informal interaction — have always been apparent. However, for many companies, the degree to which they matter has changed after a year of working remotely.

Naturally, a manager’s ability to monitor a team working remotely depends not only on the nature of the work but also on the manager’s skills. Not every manager has the skills required to be a good leader of a remote team, but these abilities get better with practice. Many leaders have become adept at video check-in meetings and even hiring workers without meeting them. So there is an argument that many people’s remote management skills are a lot better at this than they were before the pandemic.

Employees have also become more adept at interacting via technology, whether this is done by videoconferencing or via platforms such as Slack. Supporting these technologies requires investment, but the biggest cost of switching to remote or blended work — the cost of adopting to the new technology — has already been paid. Nobody should commit to long-term remote work because they want to recover the sunk cost of moving online due to the pandemic. However, the pandemic irreversibly reduced the cost of switching to remote work and made this choice cheaper. This means that it now becomes easier to switch in and out of remote work when convenient or necessary.

Taken together, these forces are leading most companies to conclude that more activity will occur online. Although survey results vary, some academic estimates suggest that around 20% of work days will be spent at home. This suggests that offices will only need around 80% of their pre-pandemic capacity.

Factors to Consider if You’re Considering Reducing Space

The following factors should guide companies as they think about not only how much square footage of office face they will need in the future, but also the location of that space. These decisions go hand-in-hand, since size, location, and costs are inter-related decisions when planning for offices:

Attitude of employees.

Surveys show that most office workers actually want to go back to an office — but only two or three days per a week. That suggests that providing an attractive workspace for the most talented people will require less space than it did in the past, since it’s unlikely all employees will be in on the same days. This suggests that the quality of the space should become more important than the quantity, and companies are likely to focus on smaller spaces that provide better services and amenities.

Proximity to clients, customers, and amenities.

According to urban economists, modern cities exist for two reasons: 1) Companies benefit from being nearby other firms and workers, which increases wages and profits, and 2) Certain amenities (such as upscale retail stores or restaurants, specialized health care facilities, or easy access to services such as ride-sharing) benefit from scale and are only available in densely populated areas. As companies shift to a hybrid or full work-from-home model, the benefits of being located next to other firms’ offices may decrease due to reduced density. Being physically close to your clients and collaborators becomes less important when more people work remotely, so the benefit of having an office in a central business district will probably decrease. At the same time, being close to amenities may matter more. If you’re traveling to the office mostly to socialize with colleagues, rather than do heads-down work at a desk, being near restaurants and parks becomes more important.

Changing commuting patterns.

In the past, a key consideration in choosing office locations was making sure that they can attract the best people. As trips to the office will not necessarily be frequent, more people will live further away from their office, so key locations will attract more talent from further away. This will make access to short-distance commuting options (such as subway stops) less important and long-distance transport (such as proximity to highways or commuter rail stations) more valuable for office locations.

Office design.

Increasingly, attracting the best talent will not be about the location of the office in relation to their homes but in relation to their career aspirations. When they choose to go to the office, talented workers will be attracted to offices where they can work more productively and focus on activities they cannot do from home. This will require less space but the location and quality of office locations will be critical.

Environmental considerations.

Since the built environment has a significant impact on the natural environment, real estate is an important part of companies’ ESG strategies. Constructing office towers consumes immense resources; heating, cooling, and electrifying them use resources each day. As companies re-imagine and reassess their need for physical space, the current crisis may be the perfect opportunity to start using office space more efficiently. For instance, for firms opting for a days-of-the-week hybrid system (in which all workers are at the office on, say, Tuesday, Wednesday, and Thursday), the reduced environmental footprint from reduced heating and cooling on the “off” days may be significant.

Cost.

A final factor in the decisions companies will be making about office space: Landlords may be more willing than ever to re-negotiate contracts. This means that even those who were locked in long-term deals can now try to rethink the way they use office space.

In conclusion, most managers may find that they do not need as much office space as they used to — and the space they do need will work better for employees if it’s designed for a hybrid workstyle and close to amenities and long-distance transport links, as locations in central business districts become less valuable.