By Guest .Blogger Doug Rowat
I used to work at a Rogers video store. You know, the old school rental store, complete with rows of empty VHS boxes, a video return drop-box and beaded curtain for the ‘adult’ section.
And explaining recently on a FaceTime call with some of my younger relatives that renting a movie actually required getting in your car and going for a drive resulted in the same puzzled expressions that I must have given my grandmother when she explained to me that movies used to have no sound.
Institutions change, old ways get disrupted and iconoclastic shifts occur in society and businesses all the time. Covid-19 is certainly going to create some permanent shifts of its own. The most lasting of which may be a decline in commercial office space demand.
This blog has hinted at this coming change several times over the past few weeks, including highlighting this recent update for BMO employees, an update that would have been unthinkable six months ago:
This week BeeMo shocked many when the bank said it expected up to 80% of staff to stay home, post-virus. No cubicle farm. No collaborative work spaces. No elevators to floors in the sky. No gleaming bank tower. Another nail in the downtown coffin.
According to ZipRecuiter, nearly two-thirds of Americans are now working remotely. And there’s much evidence to suggest that this could become a permanent arrangement for most. Gallup research, for instance, highlights that three in five of these US workers who have been doing their jobs from home during the pandemic would prefer to continue working remotely even after the restrictions are lifted.
Surely employers are also beginning to do the math and envisioning the money that they’ll save off-loading expensive real estate and overhead costs to employees. But even when we do return to the office, social distancing requirements will probably make most of the space useless anyway. Arup, for instance, an engineering group with projects worldwide, estimates that its central London offices will only be able to accommodate 35% (at most) of pre-lockdown staff. Paying top dollar for big, wide open spaces to accommodate employees’ need for social distancing? That can’t last. Either lower rents must be offered or, alternatively, companies won’t renew leases. Neither option sounds favourable for office property owners.
Now, one might argue that an increase in work from home (WFH) will eventually result in diminished productivity and an unhappier workforce because of the increased isolation. Only time will tell. However, a 2013 study published in the Quarterly Journal of Economics, showed that WFH employees at Ctrip, a 16,000 employee, Nasdaq-listed Chinese travel agency, were 13% more productive than a control group and reported higher job satisfaction. In fact, the results of the research ultimately prompted Ctrip to offer WFH to all its employees. This certainly dovetails with the Gallup research cited above.
However, perhaps the most straightforward evidence that there’s a dramatic shift underway in the office property sector is the behavior of the office property stocks themselves. Boston Properties, for instance, the largest publicly listed office property owner and developer in the US with almost 200 properties totaling more than 50 million square feet, has seen its share price plummet. In and of itself this isn’t unusual given the overall equity market environment; however, what should be concerning to investors is that its stock price hasn’t participated at all in the market rally of the past six or seven weeks. The market is saying that the coronavirus may actually permanently damage office property demand.
Boston Properties Inc. (Blue Line) vs S&P 500 (Red Line) – One Year
Source: Yahoo Finance
Does this mean that you should abandon REIT exposure in your portfolio? Of course not. As Canadian investors, office REITs make up only about 13% of the Canadian REIT universe. My colleague Ryan has already explained why REITs offer such compelling value and such attractive yields at the moment. REITs are an essential part of any diversified portfolio, particularly if you need income.
But I do highlight specific concerns for the office property sub-sector. When we’re finally all let out of our cages and released back into the wild, we may find ourselves going right back inside. The traditional workplace may have permanently transformed itself into our own dining rooms, basements or living rooms.
For many of us, there’s as much chance that we’ll return to our old office buildings as there is that we’ll walk through a beaded curtain to get access to adult videos.
The times they are a changin’.
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.