As the world talks about “remote work” and “getting back to business,” the question of what happens to commercial office real estate is shaping up to be a hot topic. The answer is not an easy one. After all, just because knowledge workers in office-based industries like insurance or technology could function remotely for a few months during extraordinary circumstances doesn’t mean WFH is a viable permanent solution.
That’s especially true for customer-facing employees. If you’re an analyst with a big-name consulting firm and your video is choppy, you can’t share an application screen or your dog is barking, clients understand for now. Most are just appreciative of having someone to answer a question or move a project along. But once people can safely leave their homes and be in an office with no domestic interruptions and a dependable internet connection? For some customers, that tolerance will wane.
In addition, most employees have zero desire to work exclusively at home. Occasional flexibility? Sure. Crammed into what may be a small space with shared Internet? Not so much.
A May CNBC survey of 9,059 U.S. workers (opens in new tab) asked, “Thinking ahead to when things are safe again, how often do you think you will want to work from home?” Just 19% percent want to make the WFH arrangement permanent, with 38% preferring to work from home more often than before. Twenty-eight percent want to go back to the pre-COVID balance, while 18% either want to be mostly in-office (9%) or back in the office 100% of the time (9%).
The reality is, COVID-19 has left us all with only imperfect choices. But CFOs of retail, manufacturing, healthcare and hospitality companies have much narrower parameters than finance leads in traditional office-based firms, who have some thinking to do.
On the extremes, if you say employees will work only from home long term, you need to either pay for, or demand employees buy, hardware, software, services and connectivity that meet minimum quality expectations.
Bringing all employees back to the office before an effective treatment or vaccine is widely available means investing to comply with OSHA and state and local safety regulations, so people feel comfortable returning. You might need a lot more space for social distancing.
This is a rough balancing act for any CFO. The costs are significant in either scenario.
Note that we’ve heard from some executives that culture is a major concern with remote working. You’re giving up spontaneous water-cooler conversations, and in some cases, productivity has taken a hit. You’ll need to work with HR and other execs to quantify a financial impact.
Let’s start with closing your office and telling all employees to work from home indefinitely. First, you need to account for mortgage and lease liabilities. What will it cost to get out from under a long lease agreement or to sell commercial real estate?
Unless you’re in an extremely hot real estate market, assume you will be stuck for the term of your lease, indefinitely in the case of owned assets. The Society of Industrial and Office Realtors’ latest numbers (opens in new tab) are grim: The group’s Office Index dropped 29%, while the Industrial Index dropped 18%, rates of decline not seen even during the Great Recession. SIOR’s indexes are based on 10 indicators of sales/acquisitions, leasing and development compiled from its members.
One reason the impacts aren’t even worse is that business debt financing options are evolving to meet market needs (opens in new tab), and at press time, low-interest-rate vehicles are expected to be fairly available. Still, it’s clear that in hard-hit areas — or everywhere if fall brings a significant second wave of the virus — the chances of offloading space without a financial hit are low.
My company, JS Group, recently did a study on the costs to outfit a knowledge worker to effectively operate from home. We factored in a range of scenarios. In some cases, an employee already has a fast, dependable internet connection and was able to bring home needed equipment. But in the case of, say, a telehealth provider or call center agent, you may need to cover VPN access, HIPAA-certified unified communications and collaboration licenses, secure cloud storage, improved broadband access, remote tech support, cyber insurance that covers risks associated with remote access and in some cases mobile devices and plans.
For executives and mission-critical workers, you may want to engage a managed IT service provider familiar with your chosen technologies to provision and maintain home-office setups. That can run as high as a few hundred dollars per month, per user for a remote environment.
Depending on the state in which you’re based and the type of remote worker, you may have to pay for even rudimentary technology. As a baseline, the U.S. Fair Labor Standards Act requires employers to reimburse (opens in new tab) remote-work expenses if paying for those items would push the employee below minimum wage or overtime pay thresholds.
Some states go further. If you are based or have employees in California, Illinois, Iowa, Montana, New Hampshire, Pennsylvania or the District of Columbia, check on applicable rules regarding expense reimbursements (opens in new tab).
Heck, futurist, founder and attorney Adam Zuckerman (opens in new tab) says executives might just start demanding “modular, podded outbuildings (opens in new tab)” that are dropped off in their backyards and include the power, climate control, gear and most importantly isolated space to work from home without interruption.
You might say the “she shed” just took a turn into the “me work.”
Sounds expensive and complicated, so instead you decide to tell all employees to come back to the office. Social distancing means you likely need significantly more space than before. If you have an open office with long, shared work tables, start shopping for individual desks and dividers. How’s your ventilation, and do your or your building’s facilities group have cleaning teams certified to disinfect the entire office at least daily? Zuckerman even visualizes AI systems that spot employees with elevated temperatures and automatically refuse them entry.
Here is a sample cost breakdown based on an internal study conducted by JS Group in tandem with RSSR in May 2020.
And remember, it’s unlikely schools and daycares will be fully open and functional in September. Will you assist with child care accommodations?
One note: Many companies, even those with strong balance sheets, stopped paying rent when the pandemic shut down their operations. Some commercial real estate providers plan to amortize the unpaid months over the remainder of the lease. If you’re not close to the end of the lease term and are thinking of simply turning over the keys, be aware that the commercial lender may file a lien for unpaid rent, which will show up on credit searches and may preclude your company from getting financing that may be needed to extend your runway.
All of this may be why a recent survey of 317 CFOs conducted by Gartner found that 74% plan to keep at least 5% of their employees working remotely. Corporate real estate research firm CoreNet Global conducted a survey of its 11,000 members (opens in new tab) and found that 84% plan to bring employees back in waves; only 16 percent reported plans to bring everyone back at the same time. They are, however, planning on offices reopening.
The permutations are seemingly endless, and figuring out what’s most cost effective is up to CFOs. While there’s more to consider than the bottom line, like employee preferences and the nature of your business, cash flow is king right now. Does it make sense to spend a ton of money on a new lease and buildout when it’s possible a vaccine is widely available in a year to 18 months?
By evaluating the work to be done, the reality of your real estate situation and remote work realities, you can strike a balance.
Janet Schijns is the CEO of JS Group and a former C-Suite Fortune 500 executive with experience ranging from Verizon to Motorola to Office Depot. Her clients regularly increase their revenues by more than 40 percent and achieve high levels of market-share growth. Areas of expertise include routes to market, channel programs and solution development, and she has worked with vendors, distributors and partners in a wide range of technology areas including services, cloud and advanced solutions. Got questions? Please contact her at email@example.com.