The Covid-19 lockdowns drove the work-from-home trend over the last two years, and as reopening progresses, some companies are moving to hybrid work. This has prompted a big question for real estate investors: Will this new work structure lead to a permanent drop in demand for office space?
Larry Antonatos, managing director and portfolio manager with Brookfield Asset Management, believes the answer is no.
“Successful companies and successful employees value the power of in-person collaboration,” Antonatos said in an interview earlier this month. “While remote work has been effective in the short and medium term, it cannot replace human interaction in the long term.”
As such, he expects working from home will become a supplement to, rather than a substitute for, working in-office — one of three longer-term trends he predicts will emerge in support of demand for top-quality office buildings in major urban centres.
“While remote work can provide flexibility, office work allows for collaboration, connection and culture, and these are essential ingredients for enterprise growth, risk management and employee development,” Antonatos said. These things are particularly important for newer and younger employees, he added.
Second, with social distancing norms and health and safety protocols likely to endure, office square footage per employee will likely increase, reversing the office densification trend of the past few decades.
Office square footage per employee decreased from 425 square feet in 1990 to 150 square feet per employee in 2020, Antonatos said. A reversal of that trend will lead to an increase in demand for office space.
Third, he expects major cities will continue to attract talent. “Urbanization has been a powerful trend for centuries for one simple reason: commerce and culture thrive in the vibrancy of a great city that brings people and ideas together,” he said.
With regards to market size, major markets will continue to be important, particularly for global companies, deal-oriented business and creative industries “where in-person contact and sharing of ideas and collaboration are critical,” he said, citing Toronto, New York and London as examples of important office markets.
For market desirability, he predicted smaller, newer markets will attract sufficient jobs and talent — due to better quality of life, better schools, easier commutes or lower taxes — to attain the critical mass of larger, older markets. In the United States, for example, Antonatos said Austin, Texas, and Nashville, Tennessee, “are success stories in this regard.”
In considering property quality within all markets, Antonatos said demand for the highest quality property will get stronger, while lesser quality property becomes less desirable and possibly even obsolete.
For example, employers are competing and will continue to compete for employee talent, and modern, well-located office environments with amenities such as gyms, outdoor spaces, dining and retail attract top talent.
“This really reinforces the long-term trend that we have seen across many decades and many market cycles,” Antonatos said. “Property quality is extremely important.”
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