How Remote Work is Transforming the Real Estate Market


 2020 was a watershed year for remote work. What had been the domain of a limited number of people burst into the mainstream. Before the pandemic hit, only 6% of employees worked primarily from home. In June of 2020, 39% of employees were working remotely, according to Gallup. While that number has moderated in the year since work from home employees still comprise 25% of the workforce surveyed. Will we see this trend going forward, and how does it impact the commercial and residential real estate markets?

The future of remote work

While we are still dealing with the pandemic, the rise of vaccines and increased knowledge about COVID prevention and treatment has generated a gradual shift back to pre-pandemic standards of socialization. In that same Gallup poll, we looked at before, a full 91% of workers who were working at least some hours remotely said they are hoping to continue working from home after the pandemic. That is a huge statistic. 30% further indicated they were extremely likely to leave their job if their employer discontinued remote work. This is clearly a very important point for workers.

On the employer side, opinions are more varied. In a PricewaterhouseCoopers survey, only 5% of executives said that employees don’t need to be in the office at all to maintain a strong work culture. A plurality would prefer a 3 day per week in-office schedule. Clearly, there is a mismatch here.

At some point, these differing opinions are going to clash and the job market is going to decide what the consensus will be. Whatever it is, our long-term remote work average will surely be higher than pre-pandemic. Workers who have gotten a taste of remote work and enjoy it will not give it up easily. Many employers who were initially reticent about working remotely have found that it worked for them, once they took the plunge. While we probably won’t get back to 30%+ remote for quite some time, a long-term average of over 20% seems feasible. To put this in perspective, 1 in 5 workers would be able to work from anywhere they choose. They also tend to be higher wage earners, so any shift in location preference will have an outsized effect on real estate and on service industries.

While actual remote employees are the focus, let’s not forget the knock-on effects of this sea change. If you have ever worked at or near an office park, you have seen the mini-ecosystem that tends to spring up around them. Fast-casual restaurants, dry cleaners, and the ubiquitous coffee shops all depend on the steady stream of office park employees to drive revenue. Without these workers, those businesses will not be able to stay open or will employ fewer people. These people will then migrate to other businesses to work, perhaps in different areas.

Residential real estate impact

So, what does this mean for real estate? First, let’s look at residential real estate. A study by North American conducted by Pew Research showed that 42% of the people who move to new cities do so for career-related reasons. If these people could move remotely, would they have made the move, and would they have moved to the same place? Maybe not. The other reasons cited in the survey were to move closer to family, a lower cost of living, and climate/environment.

States with net positive and negative migration rates. (northamerican.com)

We can see this supposition borne out by the North American migration map. High-expense jurisdictions are losing population as people move to states with lower tax burdens and costs of living. This trend has been evident for at least the last 10 years but has been moderated by the unique draw of some cities for working professionals. New York City and San Francisco are key examples of this. With the rise of remote work, many people are no longer tethered to certain locations. Naturally, they will begin to choose a living location based on other factors, such as climate and cost of living. Why stay stuck in an expensive city where you can move somewhere cheaper and retire 10 years earlier?

Let’s be clear on one aspect, city living is not going away. While many Americans show a renewed preference for small town or country living, the preference for city living has barely budged from pre-pandemic levels. Where we will see a shift is in which cities people prefer to live, and the geography of those cities. If work location is no longer a driving factor for remote employees, they can live anywhere they wish. Their wages will still be spent locally, and so will also attract restaurants, nightlife, and other service industries. Cities in the southeast and the mountain west stand to benefit the most, as they are typically more affordable and offer lower tax burdens.

For reasons we’ll get into shortly, commercial real estate will also undergo some transformations. What we will start to see are cities that are still dense, but with less of a suburban footprint. The suburbs are a compromise between the culture and career potential of the city and the peace and affordability of the country. Millions of more professionals will no longer need to make that compromise. They can now choose either the country or the city, depending on where their preferences lie.

Looking at the data for 2020 from census.gov, we can see our inferences are confirmed with the empirical evidence. In 2020, Illinois, New Jersey, New York, Connecticut, and California metropolitan centers all saw net negative migration, while Florida, Idaho, Texas, Colorado, and Georgia metro centers all saw net increases, with Texas and Florida seeing huge influxes.

Why? Let’s look at the estimated tax burden as a factor. It’s important to note that this factor is based on state averages. In New York, for instance, there are additional tax burdens in NYC that are not present in the rest of the state. These are not reflected here.

There is clearly a correlation here. As these trends continue, we will see increased movement to lower-tax locales. Cities and states will have to be increasingly mindful of their tax burdens as the mobility of the professional working class increases.

What about commercial real estate?

Commercial real estate is in a far different position than residential real estate. Thinking back to our survey of executives from PwC, let’s consider that even a plurality of executives want at least some work to be done remotely. Their biggest worry is maintaining work culture and relationships. This indicates that there will be a trend towards consolidating the workspace. The office will be more of a collaborative space. Many employees will not be in every day. There will be an increased emphasis on common areas such as meeting rooms, and less on individual offices and cubicles. Some cubicles and offices will be converted to shared use, others will be eliminated altogether. The overall footprint of a corporate office will decrease, with some small organizations removing the fixed office concept altogether.

Looking at vacancy rates in the commercial sector, office space stands out. Almost all other categories of commercial real estate have rebounded, while office space vacancy is still steeply increasing, as we see in the graph below.

Vacancy rates for commercial real estate (REIT)

What does this mean? Simply put, we are overbuilt on office space right now, and continued remote work will mean many companies are not going to require as much office space as before. Compare this to homebuyers, who are increasingly looking for more square footage in their new purchases. It’s likely that office rents will continue to drop in real cost, and that we will have some conversion of formerly corporate office zoned areas into other types of commercial or even residential real estate.

The next 10 years

We are going to see some major changes in the next 10 years as remote work solidifies into a long-term solution. More people are going to live where they want. Older individuals prefer rural living in greater numbers relative to young people, so cities will become younger. City centers will remain densely populated. Metros such as Miami, Las Vegas, and Austin will see continued population and price growth, while high tax burden and cost of living areas such as San Francisco will see an exodus.

Sought after locations with scenic beauty, like Miami Beach seen here, will continue to appreciate in price. (Antonio Cuellar)

The old adage of ‘location, location, location’ will become even more important. As commute time becomes less of a factor, coastal developments and other areas with a natural or cultural draw will see intense competition for residential real estate. Scenic views will command more of a premium than ever. Service industries will migrate to these areas as well to satisfy the demands of the new residents.

Cities themselves will become more compact, with less suburban sprawl. Some commercial-zoned office park-type properties may see a transition to residential real estate to satisfy demand and keep homes affordable. These new residential properties may also keep the neighboring businesses afloat, preventing a city’s tax base from eroding.

Country and small-town properties will continue to see a resurgence of demand as well. As noted above, older individuals prefer country living in greater numbers, but many used to find work in metro areas. With this requirement lifted for some, they will be able to return to the rural living they enjoy.

A note about tempering expectations. We will not see cities empty out overnight. There are still many individuals who cannot work remotely. Two of the next great industrial revolutions, biotechnology, and aerospace, require the onsite presence of many personnel. Retail workers cannot work remotely, nor can people who do any sort of physical labor. They will still need to live where the jobs are. But, even a 10% change in workforce mobility is huge. It will cause large ripple effects through the real estate industry, with major price increases likely in scenic and selected urban areas.

Note: the author is not an investment professional and this article should not be taken as investment advice.

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