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Big Tech vs. Big Office

Jun 01, 2020 by Brad Cartier

There has been a flurry of news over the past few weeks about major tech companies embracing work from home (WFH) policies indefinitely. There's no doubt that this will have a dramatic effect on the office market and investors who hold assets in this sector.

Earlier in May Twitter (NYSE: TWTR), Facebook (NASDAQ: FB), and Shopify (NYSE: SHOP) reported various versions of WFH policies that would enable employees who wish to work remotely indefinitely to do so. Some early criticism of these moves has been leveled against Facebook, who announced that salaries will likely be adjusted depending on where the employee resides. That said, this is a trend that real estate investors must acknowledge and understand.

Other large technology companies who have joined the ranks of permanent remote working include:

  • AWeber.
  • Coinbase.
  • Nationwide.
  • Otis (NYSE: OTIS).
  • Square (NYSE: SQ).

In a recent Colliers International (NASDAQ: CIGI) office report, it was noted that the leading office markets in the U.S. "showed signs of cooling in the first quarter of 2020. While rents are mostly holding firm or were showing modest increases (prior to COVID-19), the share of markets with rising vacancy and lower absorption has now increased."

Large technology firms are finding it increasingly difficult to justify large, expensive workspaces in downtown and urban settings. Not only is it significantly cheaper to have a strong bias toward remote work policies, but employees are enjoying the benefits as well. According to a new survey from Redfin (NASDAQ: RDFN), about 1 in 4 newly remote workers say they expect to continue working from home indefinitely. Further, about 50% of those in larger cities said they would move if they were allowed to continue to work from home.

Not only will maintaining urban offices be a cost issue for larger companies, but the health and safety requirements are becoming increasingly stringent. The U.S. Occupational Safety and Health Administration (OSHA) in late May announced a reversal of a previous policy on what an employer’s obligation is to record work-related cases of COVID-19. The new rules require most employers to investigate and make a reasonable determination as to whether a COVID-19 case was transmitted at work.

Further, the Centers for Disease Control and Prevention (CDC) issued a slew of new guidelines for workplaces following a return to work including more HVAC precautions, staggering shifts, filtration systems, physical barriers, and much more. Again, expensive.

So what does this mean for investors? Anyone with exposure to office space in their portfolios must start thinking about the new normal for the asset class and what the work environment will look and feel like post-pandemic. Consider some of the current thinking around office spaces:

  1. Touchless technology in locations such as elevators, shared spaces, kitchens, bathrooms, etc.
  2. Different materials for shared spaces that make the spread of illness more difficult.
  3. Air purification systems.
  4. Outdoor spaces that embrace social distancing.
  5. Remote-friendly workstations with laptop docks.
  6. Direction and people flow design.
  7. Health and wellness spaces and activities.

A reorientation of office space and layouts will be critical for current investors in this space. Further, any investor seeking to gain exposure to this asset class must carefully consider the location of the property. As we've seen, all signs point to a shift from primary to secondary and tertiary markets such as the suburbs.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. bradcartier has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook, Redfin, Shopify, Square, and Twitter and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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