Is Office Space Still a Compelling Investment?

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Larry Antonatos

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Larry Antonatos, managing director and portfolio manager, Brookfield Asset Management.

The COVID 19 lockdowns have definitely impacted both real estate and infrastructure. Top of everyone’s mind is the office market. Let’s start there. The COVID 19 lockdowns highlighted the ability of many office employees to work from home. Now, as reopening progresses, some companies are moving to a more flexible hybrid work structure, including both work from home and work from office. This has prompted a big question among real estate industry observers. Will work from home become an important part of the norm over the longer term, leading to perhaps a permanent drop in demand for office space? We believe the answer is no. In our view, both successful companies and successful employees value the power of in person collaboration. While remote work has been effective in the short and in the medium term, it cannot replace human interaction in the long term.

We anticipate three trends emerging over the longer term. First, working from home will ultimately become a supplement to, rather than a substitute for, working from the office. 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. This is particularly important for newer and younger employees.

Second, we think that COVID 19 will reverse the office densification trend that we’ve seen over the past few decades. With certain social distancing norms and health and safety protocols likely to endure, office square footage per employee will likely increase. This is counter to the historical trend where office square footage per employee decreased from 425 square foot per employee in 1990 to 225 square foot per employee in 2010 and 150 square foot per employee in 2020. That reversal will lead to an increase in demand for office space.

Third, and I think most importantly, is that major cities will continue to serve as magnets for 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.

Now, viewing office markets through two lenses, market size and market desirability, and viewing specific office property through the lens of quality, I have a few observations and expectations. Market size. Major markets will continue to be important, particularly for global companies and also for deal oriented business and creative industries, where in person contact and sharing of ideas and collaboration are critical. For this reason, Toronto, New York, and London will always be important office markets.

Second, market desirability. A better quality of life due to better weather, better schools, easier commutes or lower taxes will allow smaller newer markets to attract sufficient jobs and talent that these markets can attain the critical mass of larger older markets. In the United States, Austin, Texas, and Nashville, Tennessee are success stories in this regard. We think this trend will continue.

And third, through the lens of property quality, and this applies across all markets, the highest quality property will get stronger and we expect lesser property quality will become less desirable and perhaps even become obsolete. We think that employers are competing and will continue to compete for employee talent. Modern well located and amenity rich office environments will attract top talent. This means competitive office buildings will have gyms, they will have outdoor spaces, they will have retail, they will have dining, they will have entertainment. And this I think really reinforces the long term trend that we have seen across many decades and many market cycles is that property quality is extremely important.