Who still needs the office? American companies begin to cut space

NEW YORK (Reuters) – Corporate America is reducing its real estate footprint as companies allow more employees to work from home, a growing threat to traditional office building owners and a sign that companies are looking for ways to reduce costs as a result of the coronavirus pandemic.

A Reuters analysis of quarterly earnings calls over the past week revealed that more than 25 large companies plan to reduce their office space in the coming year, a move designed to reduce the second-largest expense after payrolls at corporations.

Energy company Halliburton Co said it intends to close more than 100 facilities. Financial services company State Street Corp said it will almost double the number of workers assigned to an office before adding additional space, based on the assumption that a significant part of its workforce will continue to work from home even after a vaccine emerges. against COVID-19. The bedding company Sleep Number Corp plans to curb the growth of its total area as more consumers shop online.

“It should wait and keep us on a much lower footprint really starting very soon,” State Street Corp CEO Ronald Philip O’Hanley said in the company’s earnings call on July 17.

Meanwhile, Regions Financial Corp told analysts, “Whether it’s because of increased hotel usage, work from home, or modified scheduling, we’re confident total office space will continue to decrease,” as some workers share desks. or they stop entering the building.

Analysts say plans to cut real estate are probably the first wave of cost-cutting measures to hit office workers as companies try to keep margins in what may be a long recession. So far, most of the 14.7 million jobs lost in the United States during the pandemic have been in affected areas such as restaurants, travel, and retail.

The reductions in office spending could likely be followed by layoffs and investments in technology that should help improve productivity with a small workforce, said Bill McMahon, chief investment officer for active capital strategies at Charles Schwab.

“Clearly, we are seeing companies start to streamline their physical plants and at some point they will also turn to labor,” he said.

Morgan Stanley forecast in June that work-from-home policies will increase vacancy rates in office buildings. Vacancy rates in New York will reach 10% -12% in the next two to five years from 8.7% now, while San Francisco will reach 7-9% from 5.8%, he predicted.

So far, concerns about declining office space use have not hurt commercial mortgage-backed securities, with the iShares CMBS ETF up 4.4% for the year to date.

While companies tend to reduce their real estate needs during typical recessions, the past four months of economic shutdown have shown that many workers can remain productive in their homes, said Danny Ismail, an analyst at independent research firm Green Street Advisors. As a result, the cuts companies are making are more likely to be permanent, he said.

“Each company just went through a massive work-from-home experience and for the most part it was mostly positive,” he said.

Green Street Advisors expects the office’s demand to decrease by as much as 15% as a result of the work of household policies once the coronavirus pandemic is contained.

That reduction in space requirement is likely to hurt real-estate investment firms with big exposures in cities like San Francisco and New York, as employers are expected to have more freedom for employers to live in low-cost areas far from the coast. Ismail said.

“Even before COVID-19, I had seen a migration from the coastal cities of most of the northeast and west coast to the Sun Belt markets,” he said, referring to the region that stretches from Florida to southern California, collectively known as the Sun Belt. “We believe it will accelerate in the future as the cost of living, quality of life, and ability to keep your job is much better in a post-COVID-19 world than before.”

(Corrects saying that office demand will decrease by as much as 15%, instead, up to 15% of US office workers will likely remain remote, paragraph 13.)