The Ongoing Growth Of Remote Working Places And The Death Of The Office Space Asset Class

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Thanks to amazing advances in communications technology and the nature of many businesses evolving or growing (ie online shopping), the way people work was already dramatically changing before the pandemic.

Over the past few years though, the remote and/or hybrid work trend has accelerated significantly. This shift towards remote working has not only changed the way people work, but it has also impacted the commercial real estate industry. As more companies embrace remote working and reduce their reliance on traditional office spaces, the demand for office space is declining.

In this article, we will discuss the ongoing growth of remote work and its potential impact on the office space asset class as well as some likely benefits for our passive investors.

The rise of remote working

Remote working is not a new concept, but it has gained significant traction in recent years due to technological advancements, changing attitudes towards work-life balance, and the need for businesses to adapt to a globalised economy. According to a study by FlexJobs, the number of people working remotely in the US increased by 159% between 2005 and 2017.

However, it wasn’t until the pandemic that remote work truly became mainstream. The pandemic forced many companies to shift to remote working to comply with social distancing guidelines and stay-at-home orders. The sudden shift to remote work highlighted the benefits of remote work for both employees and employers. Employees enjoyed the flexibility and freedom of working from home, whilst employers appreciated the cost savings and increased productivity.

The death of the office space asset class

The ongoing growth of remote working has led to a decline in demand for office space, resulting in a shift in the commercial real estate industry. For example, the US office market ended 2022 on a less than positive note. Net absorption turned negative in Q4 2022, whilst vacancies rose, and sub-lease spaces hit a new record high. The overall office vacancy rate stood at 15.7%, an increase of 30 basis points in the fourth quarter.

One of the main reasons for the decline in demand for office space is the rise of remote working. As more companies embrace this type of work, they are reducing their reliance on traditional office spaces. In addition, many companies are downsizing their office space and adopting hybrid work models that combine remote working and office working.

The decline in demand for office space is expected to have a significant impact on the office space asset class. As vacancy rates rise, rents are likely to decline and landlords may struggle to find tenants for their office spaces. This may lead to a decrease in the value of office space assets, making them less attractive to investors.

Potential impacts

The ongoing growth of remote working and the decline of the office space asset class are likely to have several impacts on the commercial real estate industry, such as:

Increased demand for alternative asset classes

As demand for office space declines, investors are likely to turn to alternative asset classes such as industrial, logistics and multifamily which offer more attractive returns. These asset classes have shown resilience during the pandemic and are likely to benefit from the ongoing growth of e-commerce and the shift towards remote work.

Increased focus on technology and innovation

As remote working becomes more mainstream, companies are likely to invest more in technology and innovation. This may include investment in virtual collaboration tools, cloud-based systems and cybersecurity measures. Commercial real estate developers may need to adapt their offerings to meet the changing needs of tenants.

Increased flexibility in lease agreements

As remote work becomes more prevalent, tenants are likely to demand more flexibility in their lease agreements. This may include shorter lease terms, more flexible cancellation clauses and the ability to sub-lease unused office space. Landlords may need to adapt their lease agreements to attract and retain tenants.

Potential for office space repurposing

As demand for office space declines, there may be opportunities for repurposing office spaces for other uses. This may include converting office spaces into residential units, hotels or other commercial spaces. This could lead to a transformation of urban landscapes and the creation of new investment opportunities.

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CPI Capital is aware that the ongoing growth of remote work is transforming the way we work and is having a significant impact on the office sector, leading to a decline in demand for office space.

For a multifamily real estate syndicator such as CPI Capital this may have two-fold benefits, namely:

• Improved and/or ongoing strong demand for multifamily and/or BTR-SFR rental accommodation as more and more people opt for the work-from-home option, plus some renters looking to upgrade their existing accommodation, as well as changes in amenities and facilities offered by syndicators
• More repurposing multifamily investment opportunities as office blocks, many of which are located in very prime urban areas, become available for conversion to apartment rental accommodation.

Yours sincerely,
August Biniaz
CIO, Co-Founder CPI Capital