Focus
August 14, 2020 | 14:04
Will Remote Work Change the Economy Remotely?
Economics
Economics
Fixed Income Strategy
Economics
Economics
Fixed Income Strategy
Will Remote Work Change the Economy Remotely? |
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It’s still early days, but a drastic shift in where many people work is underway. Remote work, either at home or just about anywhere except the office, has accelerated due to the pandemic. If sustained, this could impact real estate and labour markets to the benefit of suburban homeowners and workforce participation rates, but to the detriment of office landlords, urban condo dwellers and big-city government finances. The coronavirus has uncorked the telework genie. To the surprise of many employees and businesses, remote work appears to be working. The IT infrastructure is holding up, meetings and conferences are being held virtually, and tasks are getting done with little apparent loss of productivity. For some, working from home offers increased flexibility and convenience, a better work-life balance and no commuting costs. For businesses, it reduces the second-largest expense after payrolls: office space. Companies are investing heavily in networking capacity and collaboration tools to enhance productivity, and the technology that makes remote work possible will only get better and cheaper. More than a third of employees are able to work from home. A Statistics Canada study found that 39% of Canadian workers (and 37% of U.S. workers) can effectively do their jobs remotely, including more than four-in-five employees in education, financial, and professional, scientific and technical services. In July, 26% of Canadian employees (4.6 million) worked from home, compared with about 9% before the pandemic (1.6 million), though the number has fallen recently as businesses reopened. Some companies are eager to ride the telework train. An April survey by research firm Gartner found that three-quarters of CFOs plan to permanently reduce the number of employees going into the office, and a June 5 survey found that 82% of corporate leaders intend to allow telework at least part-time. A survey by Standard & Poor’s found that 47% of chief technology officers plan to reduce their office footprint. Claiming "office centricity is over," Shopify’s CEO expects to keep most staff at home permanently, while Google plans to keep its employees home at least until next summer. Facebook expects half of its workforce to stay home in the next decade, though it also just signed a large office lease in Manhattan (IBM and Blackstone are also seeking more office space in the city). Investment sage Warren Buffett sees a permanent shift towards telework. Companies will still need office space, just less of it. Not everyone can easily work from home, notably those in small condos. Face-to-face collaboration can facilitate training and creativity. Corporate culture could suffer without direct personal contact. Some companies might need more space to keep workers distant until a vaccine is found. Telework has also raised IT costs for companies, notably on cloud services. So, offices aren’t about to disappear. Many firms are likely to adopt a hybrid approach that surveys suggest staff prefer. This combines working from home with time in the office for meetings, team-building exercises, and training. A sustained shift toward remote work could result in: Lower rents and values for office buildings: Green Street Advisors estimates that demand for office space could fall by up to 15% after the pandemic is over. Less demand for offices will pressure rents and building prices lower. Some space could be converted to living space, providing larger suites for families to work in. Other offices could be converted to warehouses for faster distribution and pickup of online goods in the area. Suburban office buildings could benefit if firms take a “hoteling” approach that offers more flexible, cheaper work space closer to employees’ homes. Challenges for firms catering to the office eco-system: Long after the pandemic passes, food courts and businesses that cater to office workers could struggle to find customers. Even beyond office towers, companies selling products and services to office workers—such as business attire and dry cleaning—will see much less demand. Demand for larger living spaces: Such a shift is already underway, and stands to benefit the single-family residential market. A sharp rebound in June and July Greater Toronto existing home sales was led by detached homes and townhouses, apparently at the expense of condos. |
Increased home renovations: Telework has already spurred spending on home comfort. In fact, demand for in-home office renovations looks to have risen sharply. U.S. consumer spending on household furnishings, equipment and maintenance surpassed pre-virus levels in June (Chart 1). While a recent Altus Group survey found that Canadians plan to spend less on renovations this year, likely due to the uncertainty caused by the pandemic, this could change when job prospects improve. |
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Shift away from urban living: People are buying larger, less expensive homes in the suburbs and exurbs to more comfortably work from home. In Greater Toronto, resales jumped 10% y/y in June in the 905 region, but fell 11% in the 416 core. Detached sales in the 905 region have eclipsed pre-virus levels. In Manhattan, rental apartment vacancies are the highest in at least 14 years and rents are falling, though this also reflects job losses among lower-paid workers who tend to lease. Of course, not everyone wants to leave a city that offers amenities unavailable in smaller regions. Still, the shift to suburban and rural living could gain momentum, with added fuel from an aging population. Cottage properties (with good wireless service) stand to benefit. Families that can move to less expensive areas will see an increase in affordability, with less income required for mortgage payments and property taxes, though some companies could reduce wages of workers living in cheaper regions. Decline in business travel: The technology that lets people work from home also allows them to have client meetings online. While business travel won’t stop, it will likely stay below pre-pandemic levels, posing longer-term challenges for airlines, hotels and conference centres. Greater labour force participation: Parents, seniors and anyone living in rural areas who cannot commute or relocate to a large city should benefit from the ability to work remotely, which will increase their attachment to the workforce. Businesses will benefit from a larger talent pool, which is why more job postings are listing “anywhere” as an option for location. Some tropical destinations (think Barbados) are trying to entice workers to relocate. An increase in labour force participation would provide a temporary lift to potential economic growth. On the flip side, as more office workers compete with employees worldwide and relocate to where living costs are cheaper, wages could also be pressured downward. Possible increase in worker productivity: In a recent survey, 32% of U.S. hiring managers said productivity rose after shifting to remote work, compared with 23% who found a decline.[1] This is partly due to less commuting time and fewer unnecessary meetings. Many more hiring managers had a positive rather than negative experience with remote working, and 62% plan to increase the amount of work done from home. However, telework isn’t for everyone, notably those lacking home privacy. As well, collaboration and idea generation could get stifled over time. The jury is undecided on whether telework will lead to a sustained boost in worker efficiency, and any increase will likely cause just a temporary lift to potential growth. A large hole in big-city government finances: A shrinking office/commercial tax base and diminished use of public transit for commuting to downtown offices could strain urban fiscal finances long after the pandemic passes. This could lead to service cuts and municipal layoffs. Increased income inequality: Many lower-income workers, particularly in the hospitality sector, can't work from home. They will continue to face job insecurities and remain at financial risk in the event of a second wave or new pandemic. Meantime, higher-paid people who can work from home and relocate to less-expensive suburbs will see an increase in discretionary income due to reduced living and commuting expenses. The Bottom Line: It’s too early to tell whether remote work will continue to flourish after the pandemic, though some increase appears likely due to worker preferences and business savings. If so, we could see a sustained shift from living in smaller condos to detached homes and from large cities to smaller regions. Vacant office and retail space could be converted to living and warehouse space. Productivity could change little, but some increase in workforce participation appears likely. Telework may help some people who have lost their jobs or businesses find new opportunities. [1] Adam Ozimek. Upwork. “The Future of Remote Work”. https://content-static.upwork.com/blog/uploads/sites/6/2020/05/26131624/Upwork_EconomistReport_FWR_052020.pdf |