Our previous Orange Report described COVID-19 as the ‘Great Accelerator’ of commercial real estate trends. Before most of us had heard the term ‘coronavirus,’ Chipotle was adding drive through lanes exclusively for online orders, warehouse inventory was struggling to keep pace with an increasingly online consumer base, and companies like Zoom were anticipating that video would be the future of workplace communication. The common thread between these accelerated trends is the abandonment of face-to-face interaction in favor of digital platforms. Prior to COVID, this was happening due to demand for convenience. After COVID, it was out of necessity.

Working from home may be the trend that experienced the most dramatic acceleration. Though it was practiced prior to 2020, the pandemic forced an immediate and large-scale shift to this model. This unplanned ‘experiment’ has forced companies to deal with the ups and downs of the practice, resulting in a reimagining of how future workplaces might operate. The results of this experiment are still being debated and will continue to be for the foreseeable future, however the upshot seems to be a dramatic decrease in the stigma of working from home. So where does that leave the great inventory of existing and planned office space in this country? Does the ‘digitization’ of communication among office workers reduce the need for office space in the same way the rise of e-commerce shrunk the need for traditional retail? Or, do we feel differently about the need to connect with our peers and mentors than we do about connecting with the staff at our local Target?

Working from home affords many obvious and immediate benefits to employees. Employees often enjoy greater balance between work and professional life. They are understandably happy to avoid the cost and hassle of a daily commute. On the employer side, many executives found that the changes have been more tenable than previously imagined. According to research by PricewaterhouseCoopers, 83% of employers claim that the shift to remote work has been successful for their company, and a stark minority desire to return to the office exactly as it was pre-pandemic. A full 13% say they are prepared to go completely remote in the future.

Nonetheless, it’s highly unlikely that the traditional workspace will become obsolete. After a full year of large-scale remote work, there is increasing research showing that the psychological and social effects of working from home are significant. Microsoft completed a Work Trend Index in early 2021 highlighting several of the trends seen after a year like no other. Among their most notable: even where productivity has shown to be stable or increased, it can come at the cost of innovation, creativity and employee engagement. Social capital is extremely hindered in a remote environment, and the long-term consequences on both employees and businesses may outweigh the initial rise in productivity.

Generally speaking, working remotely leads to a more siloed workforce. The casual interactions and unplanned gatherings that occur in an office environment are nearly impossible to recreate in a remote setting.

Some employees are affected more significantly than others by a work-from-home situation. Certain individuals simply do not enjoy working from home, citing the erosion of boundaries between work and personal life or feelings of isolation. Younger employees can suffer professionally due to lack of exposure to their more experienced colleagues and living arrangements that are less conducive to a comfortable and efficient home office. Career-oriented individuals will often choose to work in a shared environment due to fear of missing out on opportunities presented to colleagues with proximity to higher-ups. Experienced employees who focus on solo projects tend to do the best working remotely, but productivity seems to suffer amongst inexperienced employees and employees engaged in high-level collaboration.

The entire commercial real estate market is still rebalancing after a difficult 2020. The office market in particular saw leasing activity decrease by nearly 50% nationwide in the midst of pandemic-related uncertainty. The road to recovery is now obfuscated by the possibility of fundamental changes to workplace communication. But how dramatic will this change be? The consensus at this moment seems to be that few major companies will go completely remote, but a large number will attempt a hybrid model in the short-term, maintaining their offices but allowing employees to come and go more frequently. Additionally, factors like density, reliance on public transportation and various industry specific factors will affect how certain markets and certain asset classes are impacted differently.

Due to the prevalence of long term leases and other factors, changes to the office market generally lag other sectors of the market. That said, while many employers are working on some variation of a hybrid model, we are optimistic that as the effects of 2020 fade, employees will head back into the office. The in-person office environment is where culture is built and without culture, you lack loyalty, impromptu creative moments, or the ability to effectively train new employees. Our belief is that as a society, we have short memories and tend to crave social interaction. These virtues of human nature will drive people back into offices once again. It just will take some time.