The increase in remote work is a global phenomenon. However, there have been big differences between countries, owing to differences in culture, industry composition, the ease and cost of commuting, demographic patterns (percent of families with small children, labor force participation rates for women), and the availability of childcare. Forecasts from Gartner show the highest impacts among office workers in the U.S. and the U.K. and the lowest in Japan and Italy.
Here to stay
In the United States, the percent of days worked from out of the office has settled at between 25% and 30%, with significant variation across industries. This compares to 5% of days worked from home before the pandemic, according to the Survey of Working Arrangements and Attitudes. The percent of days working remotely is higher for the largest 10 cities (about 35%) than for the next 11-100 cities (about 30%), but the gap has been narrowing.
For office workers, the dominant model is now hybrid working, with on-site work 2-3 days per week, and the other days remote.
The U.S. experience
We expected the rise in remote work to lead to increased stress in the commercial real estate sector in big cities, and there is some evidence to support this. However, our latest study of the California commercial real estate market, which goes through the second quarter of 2022, shows surprising overall stability.
Except for San Francisco, vacancy rates and rents have been stable through the pandemic period. In San Francisco, vacancy rates went from 2% to 14% in 2022, with more recent data at 30%. A representative example is the San Francisco based tech firm SalesForce, which has laid off at least 10,000 employees and consolidated space from around San Francisco, and is looking to sublet 6 floors in its iconic curved skyscraper on Mission Street.
In U.S. cities we are noticing stable office rents in recent years
The stronger performance of commercial real estate (CRE) in Los Angeles than in San Francisco reflects a lower concentration in those industries most exposed to WFH (working from home). In San Francisco, as in New York City, 60% or more of all wages were earned in four NAICS categories most exposed to the increase in WFH. In San Francisco, the tech capital of the world, the share of wages in Professional, Scientific, and Technical Services, one of those NAICS categories, was 28% at the start of the pandemic, versus only 8% in Los Angeles.
Across the pond
In other countries, CRE has also come under pressure. In London, office take-up in Q1 2023 was 11% less than it was in Q1 2022 and 19% below the five-year quarterly average. While there is still demand for the highest-grade space, take-up of lower quality space was 31% below the five-year average.
Meanwhile as of Q3 2022, Paris was on track for a record year. A small decline in office use by large firms has been offset by increased demand from small and medium-size firms, particularly in the luxury and co-working sectors.
Post pandemic, cities with more diversified industrial structures and less concentrated central business districts – Paris, Los Angeles – are relatively strong – while San Francisco, Washington D.C., Chicago, and New York are more at risk. London is somewhat in between.
The paradox of the WFH shock in the U.S. is that cities that have experienced the greatest economic, social, and fiscal effects of the pandemic are those like NYC and San Francisco that prospered the most in the period of the early 2000s.
These cities have been undermined by the increase in WFH, the tech-intensive downturn, and economic activity that had been highly concentrated in the downtown areas. New York, San Francisco, and Chicago have been especially hard hit in terms of their commercial property tax base, and like a number of other big cities, the rise in homelessness.
Victims of their own success
In one sense, these cities have been victims of their own success, as housing costs have outpaced costs in smaller, more affordable cities. While some recovery in New York City has been observed, and new AI technology allied industries provide a glimmer of hope for San Francisco, the effective default on loans for two Brookfield-owned office buildings in Los Angeles, a Vornado-owned building in San Francisco, and refinancing issues for the Canary Wharf complex in London are warning signals.
As commercial real estate is characterised by long-term leases, further areas of stress, particularly for older office buildings, may be expected as leases expire, and loans come due.
These various forces support the view is that we are now looking at a permanent realignment of the urban landscape in the U.S.