Sunday Supplement – 13/06/2021

Jun 13, 2021

This week I wanted to have a tilt at a deep dive on one topic, which serves two purposes. Firstly – it is very interesting on many levels and I have no other “excuse” (or the time!) to do the research needed unless it is for a supplement. Secondly – the whole subject has a massive implication for both commercial and residential property, of ALL types. There are few things as significant as that in the market I’m sure you will agree! And that subject is……..remote working.

I’ve been waiting for 14 months to have something to get stuck into on this front. I am always a bit of a sucker for research in these situations – and there have been many studies of course in remote working over time, because it is not a new phenomenon. Like many things during the pandemic – it isn’t new, but the pandemic has exacerbated many years of growth concentrated into a few months, or a year. The spoiler alert is that the vast majority of academic research published in, for example, the Harvard Business Review has always suggested massive productivity gains by working remotely, some outrageous figures such as 20%+ gains in worker productivity. Wouldn’t that be great for employers (and indeed for everyone – productivity gains are ultimately what drive real wage growth and improvements in standards of living).

There are some criticisms to research such as this however, and it is worth exploring them. Firstly, it is oft cited that these sorts of studies are pointless because students partake in them, and seek the approval of their professors and thus behave in a way that they THINK they should, rather than in the way they actually would in real life. I’m a widely known awkward case, but whenever I’ve participated in research, I’ve never (to my knowledge) subconsciously or consciously done what I think someone would want me to do. If anything, I would do the opposite. By being aware of being researched, I’m the one who would get in the elevator with everyone facing the other way, and still turn and face the front (etc.). Like many critiques, it sounds quite believable (and feels to me that is has some merit as a criticism) but is very difficult to evidence (unless you pin the difference between research and real life results as being ascribed to this phenomenon, of course – although the argument for doing that is quite weak).

Secondly, if you are cherrypicking “high achieving students” or “workers at a tech company” for a study, then extrapolating these results needs to be undertaken with caution. Really you need hundreds or a thousand “average” subjects (many of whom probably couldn’t work remotely anyway – more on that later) to interpret results meaningfully. This critique stands up pretty strongly in my view. At the minimum, it needs us to exercise caution when interpreting results. It’s fair to say I am sceptical about just how positive the research is, particularly because a lot of it is put forward by management consultants, who, ultimately make a living on the back of change, and remote working is a gigantic change (just as offshoring was a massive change 30 years ago, leading to a lot of onshoring in the more modern day as the silver bullet that was outsourcing everything is found out to be insufficient in many situations). It’s always OK for the consultants, as long as they are billing…….(and no offence to consultants, I have been one, am one, and have always tried to be a better one!)

There’s one massive missing piece here – the speed at which the pandemic descended on the world. Companies were NOT ready. The world’s greatest remote learning experiment (particularly in countries like the UK – no significantly populous country has as many knowledge workers per head as the UK) started on the back foot. Insufficient IT equipment. Insufficient cyber-security. Insufficient surroundings at home. This is all before we start on the home schooling……..

Indeed, when trying to aggregate some of the new research that has emerged since the pandemic has descended, there are four phenomena that it is worth us noting, which I will explore in turn. Firstly, work-home interference. This is, of course, a biggie. It could be a throwback to the home schooling situation, affecting a significant percentage of the workforce. Nothing was more damaging to the economy than the shutting of the schools, in raw quantum terms. But it is beyond workers with children. How about couples, sharing a one-bedroom flat and both trying to work from home? I’ve seen a fair few zoom calls where two people are trying to work in the same room, and are clearly a little bit fractious with each other for sharing the same space, bandwidth and router…….

Indeed it could be extended to anyone who wasn’t already perfectly set up to work from home. Perhaps there were lots of amazon deliveries over a period of a couple of weeks to provide for all the things that had been forgotten/were missing from a home office setup. Perhaps there were family members who needed help and support, and that had to come first and it could, freed from the cage that can be the office environment…..and so it goes on.

The second phenomenon is ineffective communication. If it wasn’t for first-hand experience of home schooling, I would definitely have this one at the top. Suddenly, all those things overheard in the office are gone! Things need to be said, and said again – chat groups are just not a reasonable substitute. What about with a handful in the office and most working remotely – even worse! Less written down, unless a strong effort made early on to overcommunicate. A potential disaster in any team working situation.

A third point is not necessarily confined to home working, but many may be more susceptible to this when working remotely. Procrastination! If it is harder to hold people to account, simply because it is harder to “see” the effort they are making, then procrastination can take hold, potentially. The last point is loneliness. For some personalities, the move away from the office to their “own” space would have been very much welcomed. For some, it will have been absolute torture! The vast majority would be in the middle somewhere, of course, with a bit from each side, every day no doubt!

The absolute key, it will surprise no-one, and the differentiator at the individual worker level, was found to be self-discipline. Again, though, this isn’t necessarily a fixed concept and may well have been a bit of a learned behaviour for some after the shock of the first lockdown.

The big challenges faced were also affected by four separate factors; social support was unsurprisingly important, as was the level of autonomy granted as part of the job – no employer will be surprised that the level of monitoring was also very relevant (and is clearly related to autonomy, although not two sides of the same coin), and workload also made a big difference, presumably because of feelings of failure or fulfilment on a daily basis.

This is all useful and important – however it would be remiss to ignore some of the base facts, certainly as they apply specifically to the UK. The average commuter spends (spent, at this stage!) just under 3 hours every day commuting to work. That’s 15 hours a week for a 5 day a week worker. If you allow a mere 35 hours sleep in those 5 days, then of 120 hours in the 5 days and 85 of those being awake, that’s just over 17.5% of the potential working time spent commuting. There are pushbacks of course – some may work on the commute – some may need and enjoy that downtime listening to podcasts or other audio content, or watching TV or a streaming service. It is very difficult to argue that this wasn’t a really significant chunk of “found time” however. Was it always used productively? Doubtful. But if that opportunity was only somewhat harnessed, no doubt it was much easier to run errands or support those who needed it without remonstration or feelings of guilt.

That’s an awful lot of hours to reclaim. Plus, commuting in itself is a tiring activity. Physically still for comparatively long periods of time. Lots of noise. Lack of control of the environment. All stressful and willpower-sapping activities. This in itself was a gigantic value-adder, particularly for the diligent. When we look back at some of the times of emails sent over the pandemic, that data itself would be quite illuminating (I look forward to that research!)

So there’s a bit of a gigantic see-saw, from the theoretical perspective, especially when put into context of the pandemic. In summary, I’d say that expecting results similar to the research pre-Covid would be very naive indeed – but the amount of time spent (arguably, wasted) between shower and desk in the morning is significant enough for there to be a net benefit when looking at working from home, or SOME working from home at least.

Indeed, since early on I have theorized that hybridization would be the way forwards. It is where the needle stops. Apple are keen to get back to the office “at least 3 days a week”. As a silicon valley-style tech company, this was a significant announcement. Goldman Sachs miss the culture of the office (this should be no surprise to any who have worked there, or known people that have worked there. They do aim for a particular type of environment which can’t be created working from home). On the other hand, some large companies have said the 5-day a week office is indeed dead and will never come back – Lloyds bank would be a good example, because they have publicly stated this year that 80% will partially work from home and the result is a 20% cut in office space. So there is actually a measurable drop in office space; there’s a tangible number on it, in a company with 65,000 employees. Four great quotes that summarise where different companies are at and how polarised attitudes are:

“I don’t see any positives [to working from home]. Not being able to get together in person, particularly internationally, is a pure negative.”—Reed Hastings, CEO of Netflix.

“The 9-to-5 workday is dead; and the employee experience is about more than ping-pong tables and snacks”—Brent Hyder, president and chief people officer of Salesforce.

“[Remote work is] an aberration that we are going to correct as soon as possible.”—David Solomon, CEO of Goldman Sachs.
“We are now in that future world where the benefits of remote work outweigh the costs.”—Adam d’Angelo, CEO of Quora

The number I suggested early on (little better than a guess, let’s face it) was a 10% reduction in demand for office. As so often, this is also too broad – because of the very level of disruption. It might be better characterised as a >10% drop in city centre office demand, with a <10% drop in demand in office space in suburbs or smaller locations. OR, a >10% drop in demand for offices over 1500 sq ft (let us say), and a <10% drop in demand in offices under 1500 sq ft (or even an increase?). But, it still looks like a reasonable first stab. The real impact still depends also on density - desks psqft has gone from 1/50 in London at the start of the pandemic up to 1/150, but there is little evidence to show how much of this is deliberate versus circumstantial (well, we already had the space, and we need much less of it for some time, perhaps permanently - so why not use it, we are paying for it after all) and the disruptive nature of the pandemic means there needs to be care taken in interpreting this. My view is that the number returns to 1/50 but how long that takes is much harder to say. It is also fair to say that there will never be as many new businesses, franchises and ventures as after a situation like Covid. Time to take stock, some will have got relatively fortunate when it comes to grant funding, some jobs have of course disappeared forever; all of this leads to new ventures and new ventures at some point want and need new space. The growth rate of office will of course pick up some of the slack based on how long it takes for that 1/50 metric to come back. However, the number of new offices (and indeed, new city centre flats) in development pre-pandemic is also a factor - some UK cities were already looking overweight in new flat development, and I suspect there will be deals to be done on stock over the next couple of years as the market pricing works itself out. Birmingham City Centre currently has 22.5% of the stock on the market SSTC (versus only 18% several weeks ago) - Newquay in Cornwall has 73.3% SSTC (down from 82% several weeks ago). Solihull as one of the nearest significant conurbations to Birmingham is 65.6% SSTC so it shows you the disparity within a few miles as it transverses from city to suburban. It also isn’t fair to put all of that on remote working or the pandemic. Cladding issues are messing with the flat market in an industrial sized way; so the data is not as clean as one would like. However, the disparity is still so significant that it is worth reporting on, periodically. Some of the best analysis I’ve read about remote work has systematically gone about trying to put some numbers and a framework around the size of the phenomenon. I’ll try to summarize that in the context of this article. McKinsey, the capos of the management consultancy industry, have done some analysis which leads to the following reasonable conclusions: In advanced economies like the US or EU, around 30%-50% of jobs can be remoted. In emerging economies like China or India, it’s more like 10%-20%. The jobs that can be remoted, however, tend to pay much better, so the impact on any given economy will be outsized when people work remotely. My theory is that the hybrid sector is much larger, going forward, for knowledge workers (who CAN work remotely) than the permanent WFHers and the permanent office workers (with very rare work from home). The issue then becomes (from the property perspective); how much WFH is enough to disrupt where you choose to live? If you WFH 2 days a week, it seems likely you will make a similar choice for where you live. For 3 days a week - slightly more will choose to live further out for a variety of reasons. Only at 4-5 days is there really the option to “up sticks” and seek a different living/shelter solution. The size of the remote working workforce, looking at a broad interpretation of the data, looks to go from 6% pre-Covid to somewhere between 10% and 25% post-Covid (whenever that happens!). That’s a massive range, but even at the short end, it is 67% larger than pre-pandemic which is significant. If you look at the 10% best guess, we would go to something like 16% from 6%, which is a near-trebling. This is serious disruption for city centre office and living in general. From a meta-study of surveys from the large consultancy companies, and jobs websites, looking solely from the employee angle - 5% of workers want full-time office back, 30% or so want WFH only, and the remainder (65%) are in the hybrid range. Of course, this is only half the story; however, in a tight labour market (and the market for knowledge workers is almost ALWAYS tight) the employees have more say than they otherwise would do in, say, Wal-Mart or McDonalds. Again, these numbers should not be ignored. Google have already backtracked after saying early on “we must get everyone back to the office” - they’ve had to listen to the employees. We do need to consider whether the shine will come off the hybrid idea, but arguably, 14-15 months is long enough to make sensible decisions here. The shine is also equally likely to come off going back to the office, for example. Pre-pandemic surveys had remote workers 22% happier overall than office workers (this is about more than just where you work however; remote workers tend to get paid more, for example) - and there are lots of those factors that directly contribute towards that happiness (lack of commute being a significant one). It is also fair to say that the likelihood is that real world results will put paid to speculation. The experiment that was undertaken was far from perfect, but companies have had time to adapt (as have employees). The figures will be in, and when trading conditions are normal (some, of course, have been busier than ever) that will be the ultimate driver at the management and board level - it is business, after all. In the US, a remote worker costs about $2k a year (or less - perhaps just $2k to set up and less per year) versus $20k a year in desk space/retail space for an office worker. Difficult to ignore a 90%+ cost-saving in this department for the CFOs…… Employees will of course also have more disposable income. In the UK 6-7% in the inflationary basket is to do with travel and commuting expenses - a significant saving potentially there, but also doesn’t take into account lunches, coffees etc. etc. which can be more pecunious when working from home. Productivity can also be addressed - here’s what a meta-analysis found: “According to UpWork, 32% of hiring managers found that productivity has increased (vs. 22% who found that it decreased). In a PwC survey, 83% of US executives considered remote work to be a success. 52% thought their companies were more productive. In another survey, 94% of employers think productivity was the same or higher (67% the same, 27% higher). Another survey suggests an increase in productivity of 15-40% with optimized remote models. And many more: Best Buy, British Telecom, and Dow Chemical have seen that teleworkers are 35-40% more productive. JD Edwards teleworkers are 20-25% more productive than their office counterparts. American Express workers produced 43% more than their office based counterparts. Compaq increased productivity 15-45% This can be put side-by-side with employee impressions too (you would hope the employers, particularly the larger ones, by now had some reasonably robust data): According to a BCG survey, 75% of employees working remotely report being able to maintain or improve productivity on their individual tasks. According to another survey, 51% of workers believe that they have been more productive working from home during COVID-19, and 95% of respondents say productivity has been higher or the same while working remotely. 90% of Dropbox employees feel they can be productive at home. Before the pandemic (2018), 65% of people thought they worked best at home (vs. 3% less productive). Employee turnover is down 10-15% (which is a massive cost saving for employers, and not easy to measure in terms of impact, but I have seen some costs for employers stated at >£30k per employee turned over, which is obviously massive).

Sick days are down 40% (despite the deadly virus – go figure). 35% of commuting time is being dedicated to work (in some companies, up to 60% of this time has been “grabbed” by the employer).

Much of the analysis above is drawn from sources that could be argued to have a dog in the fight – and it is important to try and eliminate any bias of course. That will always be a critique. I looked for some “pro-office” people to analyse, who made some begrudging statements and drew some conclusions, and came up with the following:

Working from home stigma has all but disappeared.

Barriers have been removed in terms of hardware etc. and the money is spent. Companies have a legacy attitude towards sweating assets.

Some fear of contact will live on. The point being, next time there is a nasty flu strain, we know the drill – not in terms of lockdowns (please, no) – but in terms of what people will remember and how they will react. These numbers will change but in a large survey, 12.7% say they will still practice social distancing till well after the vaccine has been rolled out, and 24.1% said they will avoid eating out and crowded areas. Even just 1/10th of those numbers is a significant change to society……

Working from home exceeded or matched expectations in 88.2% of people surveyed, in terms of how it worked out.

The fair conclusion drawn at the end of this is that the implications for commercial real estate are absolutely massive. Just as the much publicised “death of the high street” (that isn’t the death of it at all), the “death of the city centre” is not what I am calling here. There is significant repricing to take place in my view. There will be significant repurposing. This means, likely, massive opportunities in construction (many already being seen) commercially and residentially. New leisure activities. New suburban work spaces. New roles for retail parks? (perhaps). More gig economy work servicing those now working from home. Massive spends in aggregate in household improvements, and extensions. And moves towards bigger, US-style homes rather than the relatively modest space we’ve tended to occupy in the UK versus the US.

I would argue you ignore the trends and the above at your peril.

Hopefully that was of interest – I certainly enjoyed reading around it and writing it – if you did too, then please like, comment and share! At our PIP Live event on 26th June, I will be talking about how to build a significant portfolio in a short space of time, that happens to have not been affected negatively at all by the pandemic (because risks have always been kept very low). There are not many tickets remaining, and numbers are limited even though we have a massive venue at our disposal, in order to comply with Covid restrictions and keep everyone safe. Don’t miss it………