As offices empty out, CRE picture looks bleak

Similar to the 2008 financial crisis, commercial real estate values could take a hit, fueling the current crisis but for a new reason: working from home.

Before millions of U.S. workers were sent home in recent weeks due to the COVID-19 pandemic, there were 3.4 million full-time employees who reported that they primarily worked from home in 2017, according to a recent study by the Federal Reserve Bank of St. Louis. That figure represented 3% of the workforce in 2017, a spike from 1.2% in 2005, when working from home started to pick up.

Even if there was a modest continuation of 2% of full-time employees (FTE) working remotely for the next 24 months, that’s 2.6 million people, based on the latest 130.6 million FTE, according to the U.S. Bureau of Labor Statistics.

The coronavirus has already encouraged work-from-home policies that will result in a very significant reduction in the need for commercial office space.

Many business tenants are certainly reviewing their rental agreements to provide their landlord with the required written notification of their intent not to renew their office space.

On the flip side, businesses could also increase profitability by cutting overhead costs like office space and utilities. The business may then decide to increase the salary of its employees to share a portion of these savings.

Employee surveys show that remote work does not deter work flow, with 65% of work-from-home respondents saying they are more productive at home than at a traditional workplace, according to a recent Flexjobs survey.

The survey also found that half of the remote employees said working from home reduced their sick days, and the average annual income from most telecommuters is $4,000 higher than that of nontelecommuters.

The financial industry has been one of the early adopters of working remotely, as noted by the St. Louis Fed in 2019. But large banks such as JPMorgan Chase & Co. and Wells Fargo have since broadened their work-from-home initiatives in response to the coronavirus.

Still, all of these moves represent a decrease in the need for office space which has a domino effect:

The price of office space will fall, lowering the revenue generated by landlords and, in turn, their cash flow. Subsequently, the landlords’ funds to service their commercial loan with their financial institutions will fall. This can impact the profitability of the lender, potentially forcing regulators to close some financial institutions.

While the crisis is still in its infancy, financial institutions and regulators should start addressing the issue of a decreased need for commercial office space. It will impact hundreds of financial institutions.