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The Death Of The Office


  • Many companies and workers are not only embracing work from home, but they’re also wondering why they live and work in the core of places like San Francisco in the first place.
  • The shift to work from home and away from the office already is underway as stay-at-home orders slowly ease on the West Coast.
  • While nobody knows how big the impact will be, office REITs need to prepare for possible Armageddon.
  • Long, airtight leases, fancy HVAC systems, sanitary practices, and new space configurations aren't long-term solutions to what could be a systemic problem.
  • One thing is for certain: We're going to live in a world of uncertainty for the foreseeable future. Even so, office REITs must prepare for a very different future.
  • Looking for a helping hand in the market? Members of The REIT Forum get exclusive ideas and guidance to navigate any climate. Get started today »

Do you know the way to... Hollywood? Source: Author's Image

Boston Properties (BXP) and Hudson Pacific Properties (HPP) are two of the nation's largest office REITs with concentrations in major cities, particularly the San Francisco Bay Area and Southern California, especially Los Angeles. Even though we don't cover office REITs due, in part, to their high capital expenditures, we think it's equally interesting and important to consider how they might fare in the forthcoming post-quarantine environment.

Because we do not have a history of covering these REITs, we'll focus our discussion on the broader question - will Coronavirus change places such as San Francisco and Los Angeles forever? If the future of work renders central business districts somewhere between obsolete or less important, this will certainly impact firms such as BXP and HPP.

To begin our investigation, let's play a little game.

The Matching Game

We'll run through some quotes and excerpts on this subject. Match the blurb with the source. Don't cheat by clicking on the source links until after you have read through the blurbs and guessed.

Note: Some of the source links might lead you to a pesky paywall and the answer key is included after the blurbs (don't scroll too far before guessing).

You can select from the following sources:

  • Box (BOX) CEO Aaron Levie
  • Real estate investment banking firm Eastdill Secured LLC managing director, Will Silverman
  • HPP CEO Victor Coleman
  • BXP CEO Owen Thomas
  • Morgan Stanley (MS) CEO James Gorman

Blurb #1:

...much is being written and speculated about the future use and need for office space as a result of the pandemic. Several business leaders have commented on their success and operating remotely and claimed to be reevaluating their future office space needs. Further urbanization as well as office densification have been questioned, given the imperative

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

If I was long any office REITs, that would be a pretty funny disclosure. We're favoring industrial/housing as an alternative to office.

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Comments (82)

A cruise industry nightmare that could happen.
What if other countries don't accept their ships.
Already there are indications of this from Canada and Australia.
The US would accept them because they have a strong lobby group, CLIA.
The benefits of hosting their ships must outweigh the scourge of the virus.
One of the biggest mistakes investors make is they research the company but not the stock. I agree office reits, and perhaps all reits, will probably never get back to their highs. But do they have to. Their stocks came down so much, that investing in the right ones can make you money even if they never get back to where they were.Remember when Blockbuster Video and many others closed thousands of stores. Who could have predicted the new industries that would take over, nail salons, spas, immediate doctor offices, Chipolte, and many others. In a big office complex not far from where I live, two of the buildings are being converted into assisted living facilities.Try doing any of those virtual. My first suggestion, when you do your due diligence, don't factor in the dividends, because they are illusory. Secondly, if you are losing money, you probably picked the wrong one. SELL! Why are so many investors afraid to sell a losing position? Sell, take your lumps, and move on. Every good investor loses money. There are still profits to be made in the right ones. Be nimble!
04 Jun. 2020
WFH might work today when most teams know each other and have been working together for some time. what about in the future when you have all these new-hires?
What about salaries? The false assumption that you can live in Hawaii and get paid silicon valley wages iand also lock yourself out of all the other opportunities for growth in the Valley is another big miss in WFH conversations I've been seeing.
Big corp will end up paying way more for in home equipment, ergo consultations, work related injuries and more...
The office is not dead.

After working from home, I want my office!

My staff wants to go back to the office!

Perhaps some reconfiguration and re-thinking by the landlords on how to position themselves.

This is an evolution. Not a revolution.
You are a rare exception. Most of us have better ways to spend our short time on Earth than wasting 1.5 hours commuting to an office and back.
The employee performance evaluation systems have always been suspect with those responsible for evaluating performance more often than not doing an abysmal job. Why has this system continued? It gives companies legal protection and the higher ups can care less on the fact good employees often get screwed. With the new away from the office, office these evaluations will be even less accurate and careers will suffer. Micro managers cannot manage unless they are on top of you and sending emails and alerts every 30 minutes will certainly cause a mutiny.
There are linked benefits to this as well. For example, many of non performers get better reviews just based on relationship with their managers. Now with this remote setup, there is no time and space for boot licking. On the other hand, the good resources will get their due as all their hard work and output can be formally documented via emails as opposed to face to face conversations with their managers, which don’t get documented.
03 Jun. 2020
Education will follow this route for those that actually want to learn and be productive. The current system is an expensive, liberal biased babysitting service. Productivity software and remote tutorials will be the norm.
@Xalta "liberal biased"? It is true most college educated people are liberal. That's because they study a variety of subjects with people from all walks of life and aren't tied together in their one town bunkers watching Fox News and getting angry.
Joel O profile picture
Your mindset is part of the problem @Xalta . Get the liberal /conservative b.s. out of your head and realize we're all Americans and on the same team
06 Jun. 2020
Joel-unfortunately, on the ground, we are not, or at least not behaving like it .This a not a homogeneous small tight nation like say Denmark, or Isreal or even Japan. They are enormous centripetal socials forces in the USA, Other than the NFL, a desire to make lots of money, and a strong legal network (another persons “rule of law”) what did we have in common ? Race, ethnicity, religion , geography ?WE did away wioth the draft decades ago, and we increasingly dont share a common school system , as affluent people continue to migrate to private schools, hoem schooling, and sequestered tax districts that meet theri own, not their neighbors, needs. We dotn even share the same history as so many residing in the US were born overseas. Thsi is a very fragile social construct moving forward with people being laid off, access to health care and pensions wildly disparate, and our laws being challenged and disrecpted on both the right and left (ie we get to choose which laws we want to observe -cops can attack peaceful citizens, and even shoot non violent criminals, and demonstrators can ignore curfew laws, throw rocks at cops heads, and loot drug stores. The age old “e plutibus unum”” is being greatly challenged these days. We are all on the same team? As Hemingway said, its pretty to think so. Get back to me after the November elections . Our politics, economics, and superficially shared “culture” dotn seem to be up anymore to keeping this fragile and volatile nation together. One reason we cant solve “common problems” is many dont agree our problems ARE common...one persons social backstop system is another’s tax payments.
03 Jun. 2020
Why work from high tax, high “protest” places at all? Why not work from a low tax jurisdiction and keep the share that now goes into enforcing government into too many aspects of our lives.
JohnB Investor profile picture
The question is not whether a company does work from home, the question is whether it's the BEST option. You have to quantify the value of actually being with coworkers vs being on ZOOM. There's a value there, and it's real, just like 90% of communication isn't verbal, it's a very sophisticated and complex action.
@JohnB InvestorThere's also value in not having to deal with backstabbing colleagues and banal water cooler conversations.
Reading through the comments and everybody seems to have strong feelings that they are RIGHT. I think we need to ask the one and only Michael Scott for his view and what Dunder Mifflin will do. Surely thats RIGHT!
Durwood Dugger profile picture
While a lot of jobs can become more economically efficient by decentralizing work forces with full or partial work from home programs, not near all of them can. Whether commercial or residential multi-unit/high rise real estate we currently have a fine example of the need for not only improving common air quality in these structures, but sterilizing air between units as well. I see some serious opportunity for companies that are producing high volume air sterilization equipment - primarily using UV technologies and high flow micro filtration systems. Commercial or residential multi-unit common atmosphere real estate will have higher value when it can tout sterile air within.
The biggest incentive, to work remotely, is the job can be done by people in the Philippines for a fraction of the hourly wage paid to a US worker. My bank, ebay and even my old employer Michelin hire non US citizens to lower cost for office workers. Plus the nuisance of providing healthcare benefits disappear hiring non US citizens, because they have a national healthcare system.
03 Jun. 2020
Half of the people still will not understand that their pay will also shrink. Plenty still think that they are worth every penny that they get because of their knowledge. Go check with the "non-person" at the self check-out line.
thanks for the article, great food for thought. Surprised BXP and HDD trading at such huge NAV discounts.....thats worrisome
I think the whole notion of work from home has a fatal flaw.
All of the people who are on those endless zoom calls know each other --for now.
What happens when the group changes and new people are brought in.
How do they get trained? How do they participate? How do they get to fit in when nobody knows them?
Think about when you were first hired. How did it feel when you were left out of a key meeting because you were on a trip or weren't there that day?
For many, many jobs, if you are not "at work" you are in a dead end job, and if you are just out of college, I cannot see how you you get any adequate training.
As Woody Allen said, "80% of success is showing up". This isn't as much about "the need for human interaction" as it is about "if you want to get ahead, you've got to be there"
I recall the 'getting out of college days' where few would hire an
inexperienced rookie.
Lake Forester Research profile picture
Very insightful thoughts.
AspiretoRetire profile picture
The trend toward working remotely (from home, in satellite offices, on the road) is unmistakable and has been ongoing for decades. This article is one of many that has argued that, ergo, office REITs are the new buggy whip or floppy disc manufacturer. I have my doubts.

Like almost all such articles, it confuses two things: office capacity versus office utilization, and working from home versus working from remote locations. The confusion makes the case against office REITs seem far stronger than it is in reality.

First, a company typically rents office space to cover peak, not average, utilization. A lot of the staff may be out of the office most of the time, but there are certain times when everyone needs to be in the office for meetings, office functions, and other purposes. If average utilization is 50% and the company rents only that amount of meeting space, where does everyone sit, meet, and work when they all come in at the same time? Does the company rent temporary space to handle the flux? That's not very cost-effective. And worse, much of the flux is seasonal, so companies all want the extra space at the same time (certainly not the vacation-heavy summer months ) and costs of extra space then can become much worse than just maintaining slack.

I spent most of my career working remotely in higher education and management consulting firms. I ALWAYS had the same amount of office space that I would have had if I had been in the office daily. In my experience, that is pretty typical in other types of companies too.

In short, more working from home doesn't necessarily mean less need for office space. I don't see any evidence that the long trend toward working remotely, or from home, has led to less office demand.

Second, working from home while living within commuting distance from the office is a very different beast from working truly remotely. In the former, the employee works both at the office and at home, and the percentage in each may change by the month, week, or day. In this case, the employee needs a space to work at home but still has office space to meet colleagues and clients and to store equipment, books, and files. Unless the employee works ONLY from home, the demand for office space is not different. if company policy requires working from home, employees will see the cost shifting strategy for what it is - and they will be responsible for having a viable work space and the furniture and equipment they need. Employees in urban centers quickly come to resent the choice they receive: work from their dining table in a cramped urban apartment or move out of the city they've chosen to inhabit. When unemployment drops back to normal levels, the demographic-driven competition for talent will make companies far less willing to present this choice to potential employees. I also see little evidence that employees have tired of life in large cities; how many are willing to move to make working from home more practical?

Note that working remotely does not necessarily reduce overall demand for office space. Some people working remotely may be in satellite offices (which, because of inefficiencies, may require MORE net office space for the company) or working at client locations, as most IT consultants do (that shifts the cost of office space from the consulting firm to the client). The only situation that reduces the need for office space is where the company requires that the person work remotely from home - and that brings us back to the cost-shifting situation above.

The digital nomad referred to in the article is a romantic fiction. I don't know any; do you? Now if 10% of the workforce starts working that way, get back to me.

More working from home and otherwise remotely is coming, for certain; whether this affects office demand is very much an open question.
03 Jun. 2020
Your "work time" will automatically increase in hours from home, because "that is where you work". No time clocks and your always on call.
AspiretoRetire profile picture
Based on my personal experience, sometimes it does, and sometimes it doesn't. In my most productive stretches, I certainly worked many more hours than if I had been working from an office. In my worst stretches, the opposite was true. Nobody but me really knew which stretch I was in.

I suspect a lot depends on life stage, distractions, availability of a good setup at home, etc. For example, I don't know how a parent with small children, no other caregiver, and no dedicated home office can possibly be productive at home.
Two of my neighbors are "digital nomads", and have been since before the virus. And, I know others not nearby who do the same. My two stockbrokers are working at home and I - and they - see no change in the efficiency of activities we engage in. Neither want to return to the office - one claiming a 3 hour/day time savings due to grid-locked roads, and a high cost of downtown parking. Both claim to be more efficient, actually working longer hours for the firm, and having a much reduced stress level.

This is already impacting commute stuff - transit lines (now advertising to get people back on the subway, etc), and carpool lanes, park&rides, downtown parking lots and garages. Also being impacted are schools - my college roommate is a prof - now teaching from home, giving exams etc. Remote learning, reduction in dorm requirements etc. will impact university cashflows in a major way.

At home workers will also see tax benefits from claiming "office-at-home" deductions as business expenses and reducing their costs of home ownership. Governments are also going to be impacted. If you live in Connecticut and work in NYC, you pay NYC and NYS income taxes - because you work in NYC. But what if you never come to NYC - or only one day/month. NYC is going to take it in the neck, and won't be happy about it. And, if you live in CN, maybe you could also live in DL or WV.

Past "experiments" in this scheme were just that - experiments, with an easy return to the "norm." Now we have lengthy - 6-12 month trials and I think the results, as viewed by both employees and employers, is going to be very different. Working from home, this time, is not something that is going to go away, no matter how much the ultimate impact is. It is a paradigm shift with major implications throughout the economy that are just being thought about.
Some office REITs such as BXP have average lease terms of 8+ years with high quality tenants. BXP just signed Google to 15 year leases for 800K sq ft. They have no lease rollover at the Salesforce building until 2027. There are also benefits to the current situation. Variable rate loans now have interest rates under 2% for quality properties. In addition, almost no spec office buildings will be started in the near term. In conclusion, I would not compare the top office REITs to nearly bankrupt mall REITs.
Actionable Conclusion profile picture
Discount to NAV?

Is this share price discount to NAV, or Enterprise Value (share price plus debt) discount to NAV?

The former right?

What I often do when calculating what I'm actually paying per unit, is divide the EV by number of units or rooms to calculate what I'm really paying. The sector where this formula is most enlightening to me has always been with hotel REITs. It reveals a cost that I can relate to and understand.

With EV the cost can range from $200k to $400k depending on the market and other factors. This for quality locations like PEB, PK and HST. Its one of many ways to discern value. I usually like to triangulate a few various measures, and for hotels, this is def one of the mix of metrics I use.

On another note: RE exposed to office and retail is toast... especially here in the US. Anything more than extreme rock bottom price is too high
Early Retirement Advisor profile picture
@Actionable Conclusion - interesting that you see that office and retail is toast. Clearly you are new to REITs and the underlying property values. I'd be glad to help you out if you need any information for a newbie on REITs. Please do not hesitate to contact me if you need any investment advice at all.

Love your article from a few years ago on WETF. I'm sure it has done well for you!
Actionable Conclusion profile picture
Early Retirement Advisor,

Very condescending. You went to the trouble of going back to an article I wrote some five years ago? For what? You seem to have a bone to pick?

Happy to talk decisions and results anytime.

PS. Care to compare PnL files? How bout 2020? or 2019?
Dogs barking, babies crying, and show hosts with jackets and no pants are cute snippets during a time of crisis. But having working couples, or worse working roommates in a 2 / 2 apartment is not the way to spend 40 years of your life. Most companies that went from 2 person offices to wide open modular spaces have concluded that that reduces productivity, with the claim that it fosters more collaboration debunked .. it just fosters more distractions. While work at home eliminates the nerve racking back and forth commute, and some folks argue that they get more done at home, the truth is out of sight / out of mind applies, as does " when the cats away the mice will play". It will follow in the footsteps of the "part time" salaried worker.. If a full time professional is expected to work 50 or 60 hours per week for their "full time" pay, why is it that a half time worker expects and schedules to only work 20 hours per week, and expects to get treated equally ..
People want to be in an office, it is part of their social life. Not many can be self-disciplined, people also want to leave work behind and go home. When you work at home, you never leave the office. This is a Moment in Time, it will pass, people will return to the office. Besides, it like in may companies the only way to get promoted is to be in the office every day till late.
Opportunist profile picture
@Bobbie B I know many millenials in tech and sales, from San Francisco to Austin to Los Angeles. To a person NOT ONE wants to resume being in an office. They love remote work, and they say the teams are more productive and happier.
@Bobbie B employees want company cars and corporate retreats. those are gone too. Just because worker bees want something, doesn't mean it will happen. the double digit productivity gain from blurring work and office may not appeal to workers, but Corp leaders see it and are keeping it. Sell the REIT short.
Actionable Conclusion profile picture
People want to be in an office? What kind of people do you hang out with?

To say such leads me to believe you are long office RE? For such silly notions can only be compelled by ownership bias.

Offices had their century: 1920 to 2020... it is now twilight... the 11th hour for the overbuilt, over leveraged dinosaur we call the office.

Peak capacity was probably 2019... the worm has turned... here in the US that peak will never again be reached... Invest accordingly.
TopperBrad profile picture
I reduced by REIT exposure from 10% to 5% in my asset allocation (I invest in REITS via VNQ).
Green Elmo a.k.a. User 48289781 profile picture
Also on SA this morning:

Seagate to cut 500 employees worldwide in restructuring
Jun. 2, 2020 9:31 AM ET|About: Seagate Technology plc (STX)|By: Carl Surran, SA News Editor

"Seagate Technology (NASDAQ:STX) says it is committed to a restructuring plan, with plans to consolidate its Minnesota facilities into one location and reduce headcount worldwide by ~500 employees across 12 countries.

The company believes the Minnesota consolidation will provide greater collaboration opportunities and drive economies of scale. ..."

In my opinion, that's the future: Reduce headcount, consolidate facilities into one or fewer locations. The location(s) may be a lower cost location outside the big coastal cities.

"Digital nomads" --> Overhyped.
Green Elmo a.k.a. User 48289781 profile picture
Possible future of work-at-home office work: Worker bees working at home required to keep camera on worker bee, software logging time and number of keystrokes on work computer.
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