The Office Is Dead
By: Courtney Rubin
Tags: Work, Workplace, Real Estate, Business, Office Culture

The Office Is Dead

Get ready for the commercial real estate apocalypse

In early March, Jeff Haynie, the CEO of Austin-based software company Pinpoint, was gearing up to find new office space. Pinpoint’s $25,000-per-month lease with WeWork for 1,800 square feet would be up in August, and it was time to move on. He was thinking he’d need maybe 10,000 square feet for his growing company, which makes software for programmers.

Then the pandemic hit, and along with it, the enforced work-from-home orders, and Haynie began questioning his figures. A survey he conducted a month in revealed that roughly half of the company’s 27 Austin employees would be perfectly happy to continue working from home. Maybe Pinpoint could get by with 3,000 or 5,000 square feet — less than half the amount of space he’d thought he needed — foregoing desks for basically a conference room and a little collaborative working space. And maybe, given that fewer employees might need to commute regularly or during rush hour, it could be in a neighborhood far cheaper than the Domain, the hot tech cluster where Facebook and Amazon also have offices. “It’s not something I was even thinking about six weeks ago, but it’s definitely something I’ve been talking about now with my investors,” Haynie says. “Overall it’s a win-win.”

This is just the tip of the iceberg. From startups and tech giants to more old-school Wall Street firms, businesses are rethinking the role of office space and whether they even need it. If, in the old world, an office was a form of corporate peacocking — a flashy location in some iconic building with a boutique-hotel level of design for clients, employees, customers, and investors— in the new world, it is becoming a very costly line item that could be reduced to the equivalent of a single flagship store. Instead of a sprawling, capital-intensive, real-world footprint, all the work can be done virtually, with one scaled-down symbolic home base left for critical face-to-face conversations, like meeting with clients or wooing talent. Perhaps in a space not much bigger than your average Le Pain Quotidien.

It’s something no one could have foreseen three months ago. After a decade of economic expansion, commercial rents had risen to an average of nearly $30 per square foot, or 3.4% over last year, according to an April report from Newmark Knight Frank, a New York-based commercial real estate brokerage firm with offices in some 100 U.S. cities. Many companies had an aversion to remote work — IBM, for one, canceled working from home in 2017 — and few had the technology or infrastructure to make it work seamlessly. IBM was hardly alone: At the outset of the crisis, remote work evangelist and Basecamp co-founder David Heinemeier Hansson Twitter-shamed dozens of companies — including Accenture, ATT, Cognizant, Epic Systems, Tesla, SpaceX, and Wells Fargo — for dragging their heels in allowing employees work from home.

Now, more than two months in, the mass work-from-home experiment has forced many businesses out of their comfort zone, pushing them to make the necessary small investments in virtual infrastructure. Even typically staid financial firms like Morgan Stanley and Barclays have adapted, finding solutions to security hurdles that previously prevented a distributed workforce. Many of these companies are realizing that it is not only less scary than they imagined, but their employees are actually more productive. One analysis of server activity found that workers are putting in longer workdays; imagine what that kind of productivity boost might look like when kids finally go back to school. Now, staring down the barrel of a recession, companies are shifting into cost-cutting survival mode — and the huge fixed cost of office space will, for many, be first on the chopping block.

Since the pandemic, Google’s parent company Alphabet pulled out of deals to acquire more than two million square feet of office space.

A study by SquareFoot, which specializes in helping businesses find office space, found that companies in New York City spend an average of $17,020 per employee annually on office space. As companies fight to survive, that’s an awful lot of cash to burn on something that, it turns out, can be replaced by space in employees’ homes. Many commercial leases — which are often 10 years — require companies to foot the bill for unusable space, such as columns and structural elements as well as a portion of shared areas such as the lobby, bathrooms, and elevators. Among other things, a 10-year lease helps lock in prices, something desirable in times of economic expansion but a potential chokehold now.

And so comes the office space exodus. Since the pandemic, Google’s parent company Alphabet has pulled out of deals to acquire more than two million square feet of office space, including what would have been the biggest real estate deal in the Bay Area, according to The Information. James Gorman, the CEO of Morgan Stanley, recently told Bloomberg that the company has proven it can operate with “effectively no footprint” and will have “much less real estate” in the future. Insurer and financial services provider Nationwide announced plans to close five offices, permanently transitioning those employees to working from home. “We’ve been investing in our technological capabilities for years, and those investments really paid off when we needed to transition quickly to a 98% work-from-home model,” CEO Kirt Walker said in a company statement. Groupon, which recently laid off or furloughed roughly 44% of its workforce, is looking to sublease 150,000 square feet in its riverside headquarters, says the Chicago Tribune. And on Friday, real estate development startup Culdesac announced it would be giving up its San Francisco headquarters. “Remote work is going great for us,” tweeted co-founder Ryan Johnson.

Meanwhile, Roy Abernathy, head of global corporate services workplace strategies at commercial broker Newmark Knight Frank, has started getting requests from clients reevaluating their current situation: “I was just on a call where the CFO said, ‘I want you to go back to the landlord and shed 25% of our space.’”