BNP AM

The official blog of BNP Paribas Asset Management

Real estate outlook – Out of office

The COVID-19 outbreak has forced a revolution in office working in the past 10 weeks, with millions of employees working successfully from home across the world. This has led to competing claims about whether working from home will revolutionise the future organisation of work and change the nature of the office real estate business.

  • Office work is being challenged fundamentally by COVID-19
  • Can we be tempted to return to the office?
  • ‘Out of office’ could also apply to real estate investors.

Could the hearth become the new hub of the global economy? Or are solitary home workers desperate for the dynamism of office life?

Without question, many like myself have easily transitioned from the office workstation to the kitchen table, happily trading the distractions of office gossip for the overexcited interventions of a three-year old border collie.

While there is a reasonable chance that the current disruption will be relatively short-lived, the successful switch to working from home will have implications for the way that office work is organised. And any reorganisation of office work will become a focus for real estate investors.

Investing in offices has never been an overly lucrative business, given the high outlays in capital offices require to buy and maintain. The COVID-19 pandemic makes an already expensive and difficult real estate segment more problematic for investors in listed office real estate investment trusts (REITs).

Home economics

COVID-19 hit landlords across sectors in March and April, leaving US public REITs to report varying degrees of success in collecting rents in their first-quarter earnings statements.

Rent collections in April were only about 20% of what had been expected for shopping mall REITs, with open-air shopping centres paying around 60% and apartments between 90% and 95% of rents.

In contrast, office landlords reported 90% of their tenants paid rent. On the surface, this suggests there was no problem. However, most office workstations were idle despite the rent being paid. There is concern that this change could become a structural problem for owners.

Office real estate investing has had a mixed track record compared to other sectors, particularly in Europe and North America. US office returns have lagged the broader RMZ real estate index, while in the eurozone, there is a similar pattern of underperformance. However, in markets such as the UK, REITs’ office returns have tended to outpace the broader index (see Exhibit 1).

There is no simple explanation. Studies in the Netherlands and the UK show that investors underestimate the maintenance and capex required to ensure a building remains up-to-date and attractive for tenants.

Exhibit 1:

Office parks or cottage industry?

In the face of growing concerns about how office life will look when economies emerge from lockdowns, the industry has been talking up the positive aspects. The owners and managers of the office gardens of Manhattan, London, La Defense in Paris and the Amsterdam Zuidas are keen for workers to return, citing the vital experience and moments of creativity sparked by interactions around the office coffee machine.

Indeed, research shows that not everyone has the disposition and personality traits that enable them to better adjust to the new world of remote work than others. Clearly, there are many who need the dynamism of the office. Extroverts are more likely to miss the bustle and constant interruptions, while introverts like myself happily rely on ‘canine creativity’ to ensure there is some social contact in their daily routine.

On the other hand, there is Albert De Plazaola of design firm Unispace in San Francisco who has worked with leading US tech platforms. He cautioned in an interview with the BBC, “This is the first time our generation has experienced a pandemic. We're now hyperaware of health risks, and employers are hypersensitive about the potential for liability if people get sick. No one is willing to invest a significant sum on solutions that could be rendered ineffective in six-month’ time.

The changes initially will probably appear stark, but cosmetic as designers consider the structural impacts of the pandemic. Added up, the cost of these items can add up for investors and undoubtedly more will be needed further down the line.

Bordering on the possible

Some companies have already hinted at how office work will change: one leading social media firmwill limit offices to 25% occupancy, with people on multiple shifts, and it will require temperature checks when employees start to drift back in; perhaps eventually half of all its staff will continue to work at home, according to news reports (source: Bloomberg, 20 May 2020).

Any firm predictions about a post-COVID real estate world are premature, not least claims stating that office work and offices have had their day. However, working from home has never been tried on this scale before and for both workers and employers, it has proven to be more successful under the circumstances than many could have expected.

Indeed, a whopping 98% of people would like to have the option to work remotely for the rest of their careers. So, what do people like about working from home? The top benefits include (in that order): a flexible schedule; working from any location; no commute; (more) time with the family.

In that respect, it is no surprise that residential buyers in some markets appear to have begun to favour larger homes with a garden and an extra room that can be used as an office in quieter, non-urban areas.[1]

Fortune could favour a smaller office…

Such developments raise questions over the need for – open-plan – offices, not least after data showed that the productivity of US employees had risen by 47% in March and April after they began working from home.[2] This could weigh on demand for office space as employers decide employees’ presence nearby is no longer an absolute must.

Social distancing induced caps on the use of floor space for desks, but also on the number employees in office restaurants, elevators and entrances at any one time, and health concerns over air-conditioning buildings could damp demand further. This could be partly offset by businesses setting up small, local rep offices to keep business travel to a minimum as well as increased outsourcing.

…as well as a more sophisticated one

Office owners may face requests for patios and gardens to facilitate open-air meetings. Fast-forwarding digitalisation and greater office sophistication could be other aspects of the post-coronavirus world. Think: no more coffee machine, but a coffee robot; a voice-activated copier; antibacterial UV-C lights; separate guest-only areas. Such adjustments are likely to be costly and weigh on returns on investments in offices.

It is clear that investing in office property is becoming harder as the industry faces a structural shift in how work is organised. Even the most enthusiastic office socialites will need a number of safeguards in place to encourage their return to the office, while the more reluctant returnees will need even more incentives to be tempted back. Watch out for comfortable baskets and doggy snacks for our new assistants.


Any views expressed here are those of the speakers as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.


[1] Source: De Volkskrant, 9 June 2020

[2] Source: Prodoscore dataquoted in Het Financieele Dagblad, 30 May 2020


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