The Coronavirus and Commercial Real Estate: Is Office Space in Central Locations Obsolete?

This is a guest post by Larry Littlefield. 

Out of the blue, millions of Americans have been forced to work from home, and hundreds of thousands of employers have been forced to allow them to do so.   Somehow most have managed to pull it off, with a limited decrease in short term productivity, one of the few triumphs of American ingenuity of the coronavirus crisis.  Perhaps this moment for the internet is like the triumph of electricity, which had a limited impact on productivity, economic growth and American life for the first few decades after new applications for it were invented, and then suddenly transformed everything.

History suggests that there were also long lags before both steam power and electricity boosted productivity. Work by Paul David, an economist at Oxford University, shows that productivity growth did not accelerate until 40 years after the introduction of electric power in the early 1880s. This was partly because it took until 1920 for at least half of American industrial machinery to be powered by electricity. But firms also needed time to figure out how to reorganise their factories around electric power to reap the efficiency gains.

So what does this mean for office towers in central locations, built to allow large numbers of workers to interact in person, both within firms and between them?  That is the question that is being asked in media, academia, finance and the real estate industry.  And the answer seems to be 70 to 75 percent, but in different directions.

About a quarter of remote workers (26%) say that if it were up to them, they would return to their office or workplace once businesses and schools reopen.

And the other three-quarters?

Another quarter (25%) say they would rather work from home because of concerns about the coronavirus — however, presumably once that concern subsides, they would rather return to their regular workplace.

The other half of remote workers say that if it were up to them, they would continue to work from home because they prefer it. This includes 22% for whom that’s the only reason and another 27% who cite concerns about the coronavirus in addition to personal preference.

But a few days later, it appears, people changed their minds.

A majority of homebound workers are keen to get back to their workplace.

That’s according to employer review site Glassdoor, which found that 72 percent of over 1,100 employed U.S. adults said they are ready to return to their company’s office. More men (79 percent) than women (61 percent) said they were enthusiastic about getting back to the worksite, and 45 percent expect to return to be working in their company’s office in some capacity this summer. Socializing with co-workers (52 percent) and collaborating in person (46 percent) topped the list of reasons employees said they wish to return to their office.

Perhaps working from home sounds better in theory than it has turned out to be in practice.  Seven years earlier it had been reported…

According to the survey results – conducted in conjunction with

Seventy percent of workers would rather telecommute than work in the office. For workers between the ages of 35 – 44, the numbers jumped to 81 percent, while only 66 percent of those between the ages of 18 – 24 wanted to work remotely. In addition, 70 percent of parents would rather work from home.

In offices that allow employees to work remotely, jealousy is present. The survey found that 57 percent of respondents said that working remotely spurs jealousy among remote colleagues. For workers over the age of 65, the numbers jump to 65 percent. Sixty percent of parents and 75 percent of those that earn over $100K per year are jealous of co-workers that telecommute.


It is my view that the coronavirus crisis will eventually end, by no later than March 2022 even if it only ends by the hard road of widespread infection and eventual herd immunity.   But along the way it will accelerate changes that were bound to happen anyway.  So will office towers in central locations be abandoned like the old multistory mills of the early industrial age?  The main thing to keep in mind is:

The demand for space and place cannot be understood separately from its price.

The office market has already been hit with a series of large demand and supply shocks in the past 40 years, and rents are far below what they had been earlier.  A review of this history provides scenarios for the future.

If one were to look back to the 1960s, office space in central locations was very valuable because that’s where an army of low-paid clerical workers could be assembled.  This movie – “The Apartment” — was shot at 2 Broadway in Lower Manhattan in 1960, just before the building opened.  Note the rows of closely spaced desks.

Back then, a vacancy rate of just 5 percent was considered normal for downtown office buildings.  And in Manhattan, because of the need to exchange paper between them, the Federal Reserve required major money center banks and securities firms to be located south of Chambers Street.

The price of office space, however, has plunged over the past 40 years, and few markets have had vacancy rates of less than 10 percent at any time during the past 20.  According to data collected by my former employer over the decades, adjusted for inflation the average U.S. office rent plunged 40 percent from 1980 to 2004, with the biggest decrease in the 1980s, after massive suburban and Sunbelt overbuilding financed by the Savings and Loan industry.  The Savings and Loans ended up devastated as a result, in the first of what would be a series of Wall Street scandals.

On the supply side, after 1987 back office automation and relocation wiped out millions of what had been “pink collar” back-office clerical and secretarial jobs, particularly in finance, even as the number of college-educated professionals increased.  By the late-1990s, all but a handful of the people you see in the scene from The Apartment, including the supervisors, would have been wiped out by automation or replaced by people in lower-cost cities such as Tampa, and lower cost countries such as India and the Philippines.

As noted in Commercial Real Estate Analysis and Investments, 2001 version page 149.

Commercial real estate asset prices fell 30.0% to 50.0% in the span of two years in most of the major property markets, the largest drop in property values in the Untied States since the Great Depression.  The bottom was finally reached in 1992 and 1993, with a flood of new capital coming into real estate…During this period it was not uncommon to be able to buy large new commercial properties for a small fraction of their construction cost.

Adjusted for inflation office rents stayed low thereafter in much of the country, and center city office development was very limited for the next two decades. Why?

One theory is suburbanization eliminated the special value of any one particular place, with the suburbs just as good as the city center as the location for an office-based firm, and perhaps better.   There was no longer a high value land premium built into office rents, and low-rise suburban buildings were cheap to build – and even cheaper to buy after the wave foreclosures.

The excess center city space was nonetheless gradually absorbed, due to a number of trends.

First, with space more affordable the average square feet per office worker increased, as the more highly-educated workers were provided with private cubicles, if not private offices.  The tight quarters of the movie The Apartment became, for a while, a thing of the past.

Second, affordable space was rented to new, small, entrepreneurial firms in new industries – in information technology, new media, and culture.  Until 2010 almost all such firms were located in “Class B” office buildings and converted industrial buildings, to save money.   For a time even profitable firms remained in such buildings, due to a cultural preference.

Third, starting in the mid-1990s millions of square feet of what had once been trophy buildings were converted to residential apartments and condominiums, and to hotels.  This happened in just about every CBD in he country.  In New York City the building code was modified in the mid-1990s, to allow rooms to be more distant windows, specifically to accommodate conversions, at the request of the real estate industry.  As result even today, with much of the World Trade Center rebuilt, Manhattan has less office space than it had in 1999.

Rising space per worker, new businesses and types of businesses, and conversions to other uses.  That’s how central business district office markets reacted to the previous occupancy and price shock.

Then three unexpected things happened, reversing the trends.

First, the status of, pay level of, and square feet occupied by, college-educated Millennial office workers fell to something resembling that of clerical workers in 1960, and office space per worker plunged.   A college degree, it was said, is the new high school diploma, and nothing more.  (Perhaps the same will now be said of a graduate degree).

Second, the relative value of central, transit-served locations soared compared with suburban office campuses, to the point where many of the latter were abandoned and await reuse.  This happened all over the country.   In New York’s Westchester County, according to a 2013 report:

When Harrison Mayor Ron Belmont drives down the Platinum Mile, he sees once thriving office parks that now contain mass vacancies with some buildings shuttered entirely…In 1984, the Platinum Mile, the corridor of office parks on Interstate 287 in Harrison and White Plains, accounted for more than 60 percent of Harrison’s tax revenue. Today it accounts for just 18 percent. Last May, BFJ estimated that 19 percent of the Platinum Mile is vacant…

The town is looking at rezoning the Platinum Mile to allow for more adaptive reuse, the buzzword for revitalizing vacant office parks.  The draft comprehensive master plan, which was published in September, calls for creating a mixed-use zone to allow for potential development of assisted-care and senior housing, as well as retail uses and improved vehicular and pedestrian connections. Currently, the area is not zoned for residential, retail or restaurant use.

The following chart shows how much higher office rents were in Manhattan compared with the rest of the NY metro area, as of late 2019.

Why?  Perhaps for the same reason the garment industry concentrated in CBD loft buildings 120 years ago – access to cheap labor.

Third, with so many older office buildings having been removed from CBD inventories by conversion prior to 2010, shortages of cheaper Class B/C space for new firms, and soaring Class B/C rents, were reported all over the country, from Manhattan and downtown Philadelphia to Chicago to in San Francisco and Downtown Los Angeles.  By 2014 it was reported…

Earlier this year, an EDC report found that existing Class B and C office space in Gotham would be entirely filled by 2018.

The city is set to lose approximately 15 million square feet of Class B and C office space in the coming years, Pinsky said at a panel hosted by ABS Partners Real Estate, as Real Estate Weekly reported. Pinsky, now an executive vice president with RXR Realty, warned that developers have been too focused on residential development and called on them to build more workspaces that are affordable for start-ups.

“There needs to be affordable office space for the small companies and start-ups we talk so much about attracting to the city,” Pinsky said.  “If we don’t have those jobs then the housing issue is irrelevant.”

While new business formation fell nationwide after 2000, moreover, New York City in particular became more of a place where large and successful existing businesses from elsewhere expanded, and less of a place where new entrepreneurial new businesses were created.

Google has agreed to pay $600m to acquire a historic building in Manhattan’s Meatpacking District — a hundred times what it was sold for in 1996 — in a deal that reflects the tech company’s growing footprint in New York City.

The first time he sold the building, in 1996, the cobbledstoned neighbourhood was a gritty outpost with a reliable supply of transgender prostitutes and illicit drugs. It went for $6m to Moishe Mana, an Israeli immigrant who grew wealthy after founding a local moving company, Moishe’s Moving, and his partner, Erez Shternlicht. Under their ownership, the eight-storey industrial building led the neighbourhood’s turn toward trendy fashion and media companies, including their Milk Studios. It’s money, it’s the power, it’s everything — and then you get New York… Now comes Google, whose $2.4bn purchase of the nearby Chelsea Market last year reinforced the neighbourhood’s status as New York City’s technology capital.


As for the future of office space per worker, a couple of years ago I attended a presentation by Ryan Simonetti, the co-founder of co-working firm Convene, and asked him if he believed the shrinkage would continue.

He said yes.  There are three kinds of work, he asserted, “me work” done independently, “we work” done in groups, and “us work” requiring large numbers of people to gather and use common equipment.  They can all be done in different places, the way that college students spend some time studying in their dorms, some time in classrooms, and some time in the library.

“Me work,” he said, could be done anywhere.  When he wanted to focus on a work task he needed to do by himself, he left his firm’s office with a laptop, and found a quiet corner in a hotel lobby nearby.   There were no individual spaces in Convene’s NY headquarters.  Just conference rooms, an auditorium-like space, and an area with the equivalent of small cocktail tables, with outlets to plug in laptops but no other connections for them – just a wireless network.   There were no private spaces, just lockers of the sort one might have had in high school.  The “hoteling” trend that workers rejected in the early 1990s, sharing cubicles, was in his view the future, but without even the cubicles.


And now, after the coronavirus has forced employers and employees to embrace working from home, there is speculation that office space is obsolete entirely.  Why pay for office space and equipment for your workers when you could instead require the workers provide the space, equipment, heat, light, power and telecommunications service for themselves?

The coronavirus crisis is forcing white-collar America to reconsider nearly every aspect of office life. Some practices now seem to be wastes of time, happily discarded; others seem to be unexpectedly crucial, and impossible to replicate online. For workers wondering right now if they’re ever going back to the office, the most honest answer is this: Even if they do, the office might never be the same.

New York is also vulnerable to the big changes in work post-coronavirus. Almost 40 million Americans have lost their jobs, and many who are employed are working from home. Moreover, productivity hasn’t declined just because offices are shuttered. One Goldman Sachs trader told CNBC, “It’s been amazing to see how much productivity has potentially even gone up during this period.” This has turned on a light bulb in CEOs’ and CFOs’ brains: Why spend tons of money on office space, equipment and furnishings if you don’t need so many people in the office?…

Plus, many of the workers themselves who left the city to ride out the coronavirus are finding much more space for much less money: The average recent monthly rental in New York City was just above $3,400 a month and the average Manhattan apartment was 733 square feet. Throw in often-terrible commutes and high taxes, and at some point staying in the city becomes much less desirable.

That’s true for all big cities, of course, but especially for expensive ones like San Francisco and New York. In New York’s case, the impact on the tax base could be dire.


So what do I believe will happen now?  Think about working from home from three points of view, business, worker, and human.

From an business point of view, working from home has succeeded in the short run because workers are doing work they already know how to do, for firms that already exist, producing services that already exist, for customers and clients they already have.  They are doing things that are routine.  There is little need for new transactions because few businesses are expanding, and little need for training because few workers are being hired.  Just a lot of “me work” that could in fact, as it turns out, be done anywhere.

In the future businesses may allow experienced employees to do more of that kind of independent work, or perhaps all of it, at home or elsewhere.   As for working together and learning new things, however, however, those suffering from “Zoom fatigue” are finding out that online collaboration is just not as good.  In fact, prior to coronavirus pandemic information technology firms, among the first to allow employees to work from home, were calling them back to the office.

“I think these companies are really struggling to compete at an innovation level with smaller-stage organizations,” said Thanh Nguyen, managing director of HR consulting firm Connery Consulting. “They’re thinking of every single possible way to reunite people to drive better innovations.”

Getting people physically back in the office may be a “calculated risk” (as Nguyen puts it), taken in an attempt to keep up with the younger startups that don’t have to move around so much corporate red tape in order to release a product or redesign. What’s more, Nguyen points out “while [remote working] solutions like Slack and Asana make telecommuting much easier, it’s difficult when you have a sub team of 1,000.”

Moreover, having home-based workers using public telecommunications networks and their own computers creates a massive cyber-security risk.  For the most sensitive and mission-critical work, businesses are still going to want work to be done on private networks and equipment with a strong firewall to the outside.  All it will take is one devastating cyber-security incident to bring many workers back to the office.

Workers will still need to gather together for some purposes.  But from a worker perspective, will they want to?   That will depend on their point in their lifecycle.

For the unattached young, social interaction with peers is of primary importance, because they are seeking friends, significant others, and career mentors, and are having to learn new skills.  Few of them are going to want to be alone and isolated working from home.  The ability to work in an office may become a valued employee perk.

For middle-aged parents, on the other hand, working from home can be a blessing, because it solves the pre-school and after-school child-care problem.   Daily travel to an office in a central location from a distant suburb can mean leaving early in the morning and not returning until late at night.  For a two-worker family, that is a tremendous burden.  If their presence in the workplace could be limited to meetings and collaborative work, on the other hand, parents could leave for the office after the children were at school, and return before school ended, doing the rest of their work at home.

For older workers, however, working in a remote location, where their knowledge and experience are not shared with younger colleagues and the boss doesn’t see them regularly, can be a ticket to involuntary early retirement in recession. It is much easier to terminate someone, or an entire group of workers most of whom work from home, by e-mail. Take it from me.

From a human standpoint, while the social distancing required by the coronavirus has forced people to live and work in isolation, it has also caused many of them to appreciate the psychological value of in-person social interaction more than ever before.  Even people who were not highly social, or who took social interaction for granted, now find they are craving it, one reason that pushback against social distancing is increasing by the day.  That interaction doesn’t have to take place at work, but work is where people spend a large share of their waking hours during their adult lives.


What does this mean for office occupancy?  The past provides the clues.

First, there might be a “localization” of some activities, matched with the continued centralization of others.   Localization would occur as the concentration of office-based activity in the CBD once again decreased on the margin, as in the suburbanization era of the 1970s and 1980s.  As a result not only of more time spent working at home, but also more time spent working in dispersed office space in neighborhoods near home.

While companies may like the savings of having employees pay for the extra space, power and telecommunications capacity required for their work, employees might insist on space and equipment being provided for them.  Landlords of suburban office buildings and former retail spaces could rent office cubicles to employees of a variety of CBD firms who wanted to a shorter commute, rather than to a single firm for a large group of employees.  That suburban space is, and will remain, cheap, but its vacancy rate could fall.  In the city, meanwhile, those living in small apartments may not be able to set aside a separate room for their workspace, or even a corner of a room.  They also may want their employer to provide space nearby.

With localization, the concentration of mass transit and highway use at rush hour may diminish, as employees commute to their “me” work, if at all, by walking or bicycle.  And travel to central locations for “we work” at different times of the day.  This would make the transportation system more cost effective and less crowded.

One of the places where “localization” would happen, however, is in or near the CBD itself, because of the large number of highly-educated workers who choose live there, or in neighborhoods nearby.  Using New York City as an example, and the U.S. Census Bureau’s American Community Survey as a source…


One finds that 897,000 employed workers lived in Manhattan on average from 2014 to 2018, including 541,000 who were employed in management, business, science, and arts occupations.  That is because the employed, as opposed to children and the retired, are such a large share of Manhattan’s population.   The number of workers living in Manhattan could increase if fears of contagion cause older retirees to leave, and falling housing prices cause units held as second homes or AirBNB rentals to be sold or rented to permanent occupants.

Another 967,000 employed workers, including 414,583 in management, business, science, and arts occupations, lived in nearby areas of the Bronx, Brooklyn and Queens that were a reasonable bike ride, and certainly a reasonable e-bike ride, of Midtown Manhattan, Downtown Manhattan, or both.

That is 1.86 million possible workers and business partners, and 955,940 in management, business, science, and arts occupations, who could get together in a CBD office even if no one ever took a subway ride again.  That is an asset and environment unique in the United States.  Other CBDs have smaller concentrations, but the trend of highly educated office workers living near the center – and traveling by bicycle – are well established everywhere.  The invention and rapid adoption of e-bikes is extending and accelerating the latter trend.  It could prove to be as consequential to where people work and shop as the interent – and the potential to do both at home – is turning out to be.

Second, with much lower office rents office space per worker could once again rise, as in the 1980s and 1990s, rather than continuing to fall.   Although I believe that office workers, particularly young workers, will eventually get over their fear of getting sick after taking mass transit and working in office buildings, they might be less willing work to directly across from someone breathing, coughing and sneezing in their direction at the kind of cocktail tables in Convene’s headquarters.   Or in a shared office cubicle that someone else had coughed and sneezed in the day before.  If nothing else, all shared spaces are going to have to be thoroughly cleaned between uses.  If office space becomes cheap enough, the rent cost of providing individual spaces in the central office even for those who generally work from home, spaces that are therefore empty most of the time, might be cheaper than the labor cost of cleaning shared cubicles every night.

Third, new start-ups in new or existing industries might once again take advantage of cheaper office space to open.  Rapid economic change, notably the need for people to be able to live their best lives on today’s and tomorrow’s far lower incomes, may provide an opening for a new set of entrepreneurs to respond to a new set of conditions.   Lower rents would allow central cities to resume their roles as centers of innovation.  Instead of merely attracting an outpost of the existing Amazon, perhaps someone would start up a new one.

Fourth, there could be additional conversions of CBD office space to other, lower-rent uses, as from the mid-1990s though 2010.  The office to residential conversion trend may resume, in places where small floorplate buildings have yet to be converted, and for less affluent renters than in the past if the buildings could be purchased for cheap and minimally altered.   The original adaptive reuses – of loft buildings for live-work quarters for artists in Soho, and of rail terminal-adjacent hotels to single-room occupancy apartments – were for those with low incomes, not those with high incomes.

Modern large-floorplate office buildings may be less amenable to residential conversions than the small-floorplate buildings already converted.  But the originally industrial buildings that had been converted to office might be re-converted back to industrial, as e-commerce increases the demand for warehouse space close to customers.

Some lower floors in newer office buildings could be converted to parking.  Bicycle parking.  A New York City ordinance requires office buildings to allow bicycles, but until now landlords have sought to make that access as inconvenient as possible.  Having bicycles in the lobby and on the elevator didn’t match the high-end corporate image they sought to convey.  For the cost of a ramp from the lobby to the second floor, however, a landlord could earn perhaps $10 per month per bicycle in otherwise undesirable space.  Many, many bicycles can be hung on racks on a single floor.

And at $120 per year per bicycle, it certainly appears that even given the need for circulation bicycle parking could get $30 psf, which might look good in a couple of years.  Bicycle parking could become the highest rent activity for the second, third and fourth floors, and the availability of bicycle parking could make the upper floor space more desirable.

Once upon a time, parking spots seemed to be losing favor in Boston. Bike and bus lanes were consuming them, with parking fines increasing to fund the changeover. There was a lot of debate about how many — and how soon — offices and homes could go up around T stops so people didn’t have to drive as much.

Searches for homes that come complete with parking belie a possible shift coming out of the pandemic: fewer people wanting to take mass transit out of fear of contracting COVID-19 — social distancing is nearly impossible at most hours on the T — and more people wanting to drive (even though pre-pandemic Boston had some of the worst traffic congestion on earth).

If biking to work drastically increases as office rents decrease, moreover, those traveling to the office each day might prefer a location with showers and small closets for their professional attire. The work trip would take the place of time spent at the gym.

During the past decade the high price of CBD office space, and soaring retail rents in locations close to the center, have made it difficult to open child care, pre-school and charters school establishments in these areas.  If the price of office space falls additional floors could be occupied by these facilities, a benefit for working parents who live in central locations.  Having a bunch of noisy children in general, and rambunctious middle school and high school children in particular, on site doesn’t fit the corporate image either.  But low rents might convince landlords and businesses to change their minds about the importance of image vs. revenue.

In summary, if Manhattan office rents fall, Manhattan office space will fill, just as it did after the early 1990s debacle.



This is a positive scenario.  Shorter commutes, flexible work schedules, and falling office rents allowing additional activities what have been priced out, all to the benefit of everyone except for existing office tower owners and their lenders.  Even to the benefit of new office landlords, who could purchase buildings out of foreclosure and find ways to turn them around.  As was the case 30 years ago, new owners and the existing owners who survive could find a way to get creative.

There is, however, a darker scenario.  If telecommuting really is feasible for everyone, and workers can in fact work from anywhere, is there any reason for businesses to hire expensive Americans at all?

Think of these as 21st century migrants — telemigrants — who are competing for American white-collar and professional jobs without ever setting foot in the U.S. This tidal wave of talent is coming straight for the good, stable jobs that have been shielded from globalization. America’s middle class won’t welcome this new competition, and a wall on the southern border won’t stop them.

Telemigration is growing at an explosive pace. Employers find these workers convenient and flexible as well as low cost. These talented foreigners are happy to work for much less than American workers with the same skills since they live in countries where $5 an hour will buy a middle-class lifestyle.

They aren’t covered by the same labor laws, or health, safety, or environmental regulations. They don’t ask for severance pay, paid holidays and maternity or paternity leave. Nor do they contribute to Social Security, help pay for medical insurance, pensions, or any other advanced economy social policies.

In the “globally competitive wage” scenario Americans may be working at home – doing piece work for just enough money to eat, like home-based garment workers 120 years ago.

Larry Littlefield