If pushed to outline my theory on The Great Return to the Office™, it would go something like this: even when it is safe to do so, workers won’t be back en masse.
It won’t be the incidental lifestyle benefits or antisocial aftershocks of the pandemic that get in the way. Over time, new-found attachments to 8.30am alarms and puppies and any aversion to in-person colleague contact will fade. But a dislike of long daily commutes will remain.
For many who can work remotely and vaguely effectively, travelling to do it in another place will feel like an unnecessary, stressful and costly performance. And because offices are, well, immovable physical structures, demand for space won’t rebound.
That’s just one view. Louder voices, most notably in high finance, bang the drum for old-fashioned in-person, show-up-to-get-ahead presenteeism. “If you can go into a restaurant in New York City, you can come into the office,” Morgan Stanley chief James Gorman told a conference in June.
While not without its merits, this strawman appeal is less convincing than another favoured argument of investment bank chiefs: that younger staff learn from being in the room where the deal or trade is made.
Granted, company cultures and trust need sustaining. But for most businesses, the combination of productivity gains and potential rent savings brought about by WFH or hybrid working will prove hard to ignore and mean a lighter office footprint wins out.
Longer term, it’s hard to see why employers would set geographical limits on an office talent pool. In turn, landlords may well struggle to grow rental income and have to take large valuation hits.
I am also given to myopic thinking. My own viewpoint is framed by my own less-than-full office in a particularly empty part of London. The City, also home to the bankers and professional services types Gorman is talking to, still lacks its old buzz.
This is reflected in Transport for London data, which shows Underground and DLR journeys are still around half their pre-pandemic levels. And who can blame London’s office workers? A few months before the pandemic hit, a report by Work Wise found the average there-and-back London commute had climbed to 79 minutes. For the armies travelling in by train, that is likely to be an underestimate.
What does this mean for the value of office space? For the prime buildings inhabited by businesses like Morgan Stanley, whose sky-high fees shrink concerns around real estate overheads, the shake-out is likely to be protracted. Arguably, bigger questions hang over the mid-tier estates of Derwent London (DLN) and Land Securities (LAND), hence their discounts to net asset value (NAV).
Outside the capital, where commuting by car is far more common and usually well under an hour, you’ll find more bullishness. “I have great belief that the vast majority of people will be back in the office the vast majority of time,” says Stephen Inglis, chief executive of London & Scottish Property, the investment manager of Regional Reit (RGL), which owns 151 properties outside the M25.
But it’s hard to see office space rental income growing strongly over the coming five years, particularly with mounting inflationary pressures elsewhere. “Neither the employer nor the employee knows how long this is going to last, and neither do we,” says the chief executive of one FTSE 250 landlord.
Hedge your bets by all means. But if commuting can be avoided, it will be.
