Back to the Office vs Work from Home vs Hybrid

What It All Means For Commercial Real Estate - And Your Portfolio

What is in store in your future, career wise? What are you doing right now? Are you still working from home or are you back in the office? Increasingly, big employers are demanding that workers who had been at home working remotely during the pandemic have to go back into the office. But it's still an uncertain situation and very dicey as employers and employees are trying to figure this out. Are you back in the office at all? Are you there full time, maybe part time, a couple of days a week on a sporadic basis? 

Well, if all of the workers aren't back all of the time, it means that companies are sitting on empty offices, often tens of thousands, hundreds of thousands of square feet of empty offices at a very high expense in rent. It's creating a big problem. In New York City, 20% of offices are vacant. We have thousands of companies that are discovering they now have excess office space. They only have half their staff in the building at any given moment. They therefore need half as much office space as in the past.

So a lot of companies stuck with long-term leases, are subletting their offices, trying to find others to pick up the tab until their lease expires. It's a real dilemma and it raises questions. If there's so much empty offices right now and you happen to be coming along needing office space, you can probably find a bargain. And it's a problem for commercial real estate developers. Why would you want to build a new building when there are so many existing buildings available for someone to lease? What does it mean for the value of commercial real estate? What does it mean for the future value of commercial real estate?

Well, in the United States and Canada, pension funds are declaring their viewpoint. They are selling their investments in office buildings, and they're doing it across both countries. They all typically own real estate as part of their diversified portfolios. But according to Pension and Investments magazine, they're now selling their investments and office buildings and they're buying different kinds of real estate – such as warehouses, laboratories, houses, airports and film studios. And by renting out those facilities, they're able to generate income, rental income and watch the value of those properties rise, they hope. 

Their attitude is they're more likely to get tenants to pay a high rate and they're more likely to watch these properties rise in value. Then they'll find an office building. So it's a sign of the direction of the commercial real estate marketplace.

In North America, pension funds manage about $6 trillion and they have 9% of it in real estate. This is a very big deal. In Ontario, the Municipal Employees Retirement System is cutting its holdings of office buildings more than 50%. Within their real estate portfolio, almost half of it was office buildings. They're cutting that to 20%.

Three years ago, pensions had 17% of their real estate in retail space, you know, shopping centers and malls. They've cut that from 17% to just 10%, showing that not only are they bearish on office buildings, they're also bearish on retail space because their attitude is more and more people are shopping online and not so many are going into stores physically. This is further illustration how a combination of technology and the pandemic are changing the nature of real estate and how maybe you need to be reconsidering your investment strategy if you like to hold real estate as part of your diversified portfolio.