Responding to Chris Herd's Remote Work Predictions

Chris Herd of Firstbase recently put out some amazing and profound predictions for the #FutureofWork and as someone who helps companies with their office space strategies whilst also being a remote worker myself (living in a place where neither my company nor any of my clients have an office!) I feel I am in a unique position to add some additional context.

With respect to Chris’s broader themes on the evolution of remote working I’ll say that I agree with just about every one of them and as a remote worker myself, I am excited to see them progress. But while I agree with these themes, I am not an authority on remote work (perhaps one day!) so my focus with this article will be in specific reference to his commentary on the office sector.

Here we go:

“???Office Death: If you go to the offices of big tech companies, out of thousands of seats only 2-3% are used on a daily basis.”

My response: Occupancy levels are very low and lower than what any publicly available data depicts (much of this data is also very surface level to begin with so should be taken with a grain of salt) but with this in mind, I am confident that occupancy will keep climbing on average as many large employers lay the hammer down on mandates. While I don’t support mandates, I expect them to be aggressively enforced by most large, traditional employers (including some of the largest tech firms) so this is why I hold this belief. ?

**As an aside, it’s important to note that currently office occupancy levels are hovering at +/- 40% of pre-covid levels in most major NA geos BUT occupancy levels were only at +/- 50% on average pre-covid so in reality these figures only represent +/- 20% occupancy…scary stuff (think of the climate crisis and commercial real estate's impact as just one example...)!

“Leases are expiring and not being renewed — Companies won’t have space to ever return.”

My response: While more leases are set to expire than ever before (it’s truly unprecedented), this statement is still a major over generalization as many companies will likely continue to kick the can down the road, renewing short term or in some cases are going medium/long term (in many cases these companies will be making MASSIVE blunders but it will still happen…). Yes, lots of small businesses that are comfortable with remote have/will continue to let their leases expire but we also have to remember that the majority of businesses still have a very traditional mindset around work being a 'place' even though for the knowledge workforce it is clearly not…and as such aren’t meaningfully downsizing or ditching their offices (yet…). Off the back half of this decade I expect a wave of space reduction will happen once companies truly discover how bad their utilization rates will be (especially when they start to compare against pre-covid levels...) but there isn’t enough data yet and again, the corporate mindset hasn’t evolved at the same rate as the employee mindset.?

“??Construction Cancellation: perfect storm of high commodity prices and empty offices will lead to far less being built.”?

My response: New developments that started construction pre-pandemic are still having some leasing velocity occur and in many cases these buildings are close to 100% leased. The buildings that stand to suffer are the ones that have recently broken ground on spec or the ones being marketed to anchor tenants. Where before the pandemic these new developments were absolutely on fire, I now expect leasing velocity to cool off quite a bit as only the most deep pocketed and/or FAANG caliber growth companies will speculate on leasing space without much information on their employees newfound behaviours. The only outlier to this might be companies that have fully wrapped their heads around what their downsizing will look like but in most cases these companies won’t be large enough to kick off a new development, they are more likely to take up the remaining vacancy in projects that are already under construction or stand to lease the plentiful existing vacancy.?

“There will be a huge deficit in high quality spaces optimized for remote workers when they do come together physically.”?

My response: Definitely true. While there are gobs and gobs of direct/sublease space on the market, almost ALL of it is designed for a style of work that now rests with the dinosaurs. Additionally, no cities have enough coworking space + quality meeting/event space but this will change as the market forces the hand of landlords and sees them having no choice but to partner up with more and more Space-as-a-Service operators to both stop the bleeding and also to start the process of matching supply with the newfound desires of demand.?A great example of this will be the growth of Convene through their investment from HBC.

“??Micro Coworking: spaces close to home will rise rapidly for people who don’t want to or can’t WFH.”

My response: I definitely think this is coming but expect that it will take more time than we think for this segment to grow. Firstly, one of the best plays for this is within residential developments but developers will still be handcuffed by current valuation methodologies which in more cases than not prevent them from undertaking the preferred SPaaS agreement, a management deal. Additionally, most companies still aren’t showing any signs of a willingness to pay for these types of spaces for employees and until that sentiment starts to change I don’t expect this segment to explode. But make no mistake, I expect it to, I just can’t put my finger on when…

All in all, I think the office market in most major cities is in for a reckoning over the next 5 years and beyond but it’s just not going to be as aggressive as Chris depicts. For now, in major markets that have an institutional landlord composition (like Toronto), I expect vacancy to either remain flat at current pandemic induced highs or in many cases continue to rise due to the already known consolidation plans of large enterprises (this is a pre-pandemic story) and the incremental downsizing strategies of medium and large companies alike. The assets that will get hit the hardest are B and C quality as companies continue to move to better quality buildings (downsizing along the way in many cases).

**As another aside, I think its borderline reckless to suggest that office vacancy will decline anytime soon as despite any fluctuating upticks in leasing volumes some of this will be "stale" absorption, short/medium term renewal deals being reflected as net positive absorption (we should really only be considering actual vacancy when depicting these figures), additional sublease space hitting the market in the years to come and shadow vacancy. In Downtown Toronto, Q1 2022 vacancy came in at 10.9% and it wouldn't surprise me if this got to as much as 15% by the end of the year. Where it goes from there is anyone's guess but a distinct possibility is UP due to the factors I reference above.

As I end this post I want to take a moment to applaud Chris Herd. He is absolutely fearless in his willingness to put out his point of view (with his own vested interests of course) and its clear that aside from his own vested business interests, he wants a better working world for as many people as possible.

I certainly hope all of his predictions come true and my guess is that they will but perhaps slower than he thinks…

Bravo Chris and happy birthday!