What are the effects of the decline of the office?
With the Covid-19 crisis forcing businesses to reduce headcounts, make flexible working mandatory and scrap office space, what does 'the death of the office' mean for companies in the long term?
While we have in many ways adjusted to life in a pandemic, the changes we’ve seen since the initial nationwide lockdown are stark. The "death of the office" narrative has persisted through the easing and then reimposing of lockdown restrictions, and while no one can predict exactly how this will play out, it is clear that the office in its traditional sense will be seen less in a post-Covid world.
The rise of flexible and hybrid working models has come with many positives, namely helping to improve work-life balance. However, even a relatively small change in the value of the global office space sector — a $22 trillion asset class, worth more than even the largest single economy in the world — has consequences on a colossal scale, for everyone. We have seen the Covid-19 crisis already exacerbate economic inequalities, and yet the idea that a reduced office footprint will impact the wealth of the average person has been overlooked.
As consumers, investors and savers, we are more affected by the fate of the office real estate sector than we think. In fact, the vast majority of us are dependent upon the economics of office space.
Why? Because office space as an asset class is worth around 24 per cent of all stock markets combined, and about four times the size of the largest technology companies in the world. The sheer size of the sector and its many interdependencies means that even small shifts in this market can create a domino effect of seismic proportions.
The market, particularly in London, is owned by pension funds, insurance companies, banks and investment funds.
Any reduction in ability to meet liabilities or decreases in asset value poses a huge risk in the chain back to the average saver. If the likes of AXA, Aviva and Fidelity start to see the value of their office buildings drop and the income from office rent dry up, this will directly affect the value of our savings and pensions, and their ability to make regular payouts.
There are also huge swathes of the economy that rely on office space, including the businesses dependent upon the sector and the central districts where offices are usually located, which feed into saving funds too. For now, office rental prices have remained relatively stable despite last year’s turbulence.
The office market pre-Covid in most large, successful cities such as London, New York, Paris and Hong Kong was overheating due to huge demand where supply was unable to match. But although this threat isn’t imminent, this year we will start to see office space in those cities come up for breaks, expiries and renewals. With 76 per cent of Fortune 500 chief executives looking to actively reduce their office footprint, we may start to see the unfurling of the sector in 2021.
Even as the office sector declines, it’s inevitable that other uses for this space will fill its place — whether that’s more housing or venues better equipped for hybrid working. However, as we’ve seen with retail over the past 10 years, this change is likely to be a slow evolution rather than a snap revolution.
That could potentially create years of uncertainty in the sector — and, in turn, hit the pockets of the average person. In short, proponents of long-term remote working should be careful what they wish for — ditching the office too suddenly could make us all poorer.
Tushar Agarwal is CEO and founder of HubbleHQ
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