Work from home and business real estate

Antonin Bergeaud, Jean Benoit Eymeoud, Thomas Garcia, Dorian Henricot January 18, 2022

As employers and employees have implemented remote working methods to limit physical interactions during Covid-19 outbreaks, working from home has become increasingly routine. This column examines how players in the commercial property market have adapted to the growth of telecommuting in France and finds that it has already made a noticeable difference in office markets. In departments more exposed to telework, the pandemic has led to higher vacancy rates, less construction and lower prices. Forward-looking indicators suggest that market participants believe the shift to remote working will continue.

One of the main hysteresis of the Covid-19 pandemic on the organization of work is probably the spectacular take-off of teleworking. Forced by circumstances, employers and employees have had to implement new ways of working remotely to limit physical interactions during the acute phases of the epidemic. This experience has prompted companies to invest more in computer equipment and to adapt their management practices. Teleworking has thus already become a common practice for many workers and should continue (Barrero et al. 2021).

The polarization of economic activity has led to a significant increase in real estate prices in dynamic areas. Office real estate is no exception and the cost of business real estate is increasingly weighing on business results (Bergeaud and Ray 2020). Companies taking advantage of telework to reduce the demand for office space could induce a structural slowdown in the commercial real estate market. In the United States, Bloom and Ramani (2021) show that the pandemic and the rise of telecommuting are already having a substantial impact on the spatial dynamics of urban real estate, producing a “doughnut effect”. In a recent study (Bergeaud et al. 2021), we examine the first signs of such an adjustment in France.

Local heterogeneity of the propensity to telework

We first define an index that measures exposure to the deployment of teleworking at the department level (department) level. The index is the product of two components. First, we use the indicator constructed by Dingel and Neiman (2020) at the occupation level and apply it to the local composition of labor in France. We interpret this as maximum telework potential. However, this upper limit is unlikely to be reached in practice (Bartik et al. 2020). In addition, we introduce frictions (quality of internet infrastructure, average travel time, number of families with children) that prevent the full use of the potential of telework. We extract a principal component of these frictions and combine it with the maximum potential to construct a single index that measures the actual propensity to telecommute by county.

This indicator is presented in Figure 1. Although it naturally shows a strong correlation with population density, we found that it remains positively correlated with the actual intensity of telework after being residual. The bottom map plots this residual geographic distribution.

Figure 1

To note: The top map shows the teleworking index by department. The bottom map shows the telework index purged of density effects. For both maps, counties with the darkest index have the highest telecommuting capacity.

Corporate real estate market adjustments

We analyze the differential evolution of corporate real estate in counties with different telecommuting propensities and show that stronger corporate real estate market adjustments occur in areas with higher telecommuting propensities. high.

On the quantity side, the top panel of Figure 2 shows the evolution of actual office space built since 2018 (dark blue line) and its trend before Covid-19, extrapolated (light blue line). The bottom panel shows county-level loss based on the telecommuting index. While the whole country has experienced a significant slowdown in terms of new construction, the losses are unevenly distributed across the territory and positively correlated with the teleworking indicator. Importantly, these effects control for economic activity, measured as local variations in unemployment.

Figure 2

a) Dynamics of the construction of office spaces

b) Loss of office buildings and teleworking index

To note: This figure shows (a) the time series of office space construction losses (seasonally adjusted and relative to trends detailed in the text) between February 2018 and March 2021, and (b) the correlation between office space construction loss office spaces after the outbreak of the pandemic and the county-level telecommuting index.

To examine price reactions, we use building-level information from the regulatory reports of French property investment funds (FIEI). REIFs report quarterly valuations of their building-level assets. We estimate the marginal effect of a change of one percentage point in the teleworking indicator on the probability of a downward revision of the prices of buildings in the office segment compared to the other segments each quarter. These effects are plotted in Figure 3 along with the 95% confidence interval. Before Covid-19 (red line), there was no significant difference in price adjustment dynamics; after the pandemic hit, office prices in highly telecommutable counties were lowered more frequently than others.

The magnitude of the effect (the sum of the coefficients from 2020q2 to 2021q1) suggests that a one standard deviation increase in the value of the teleworking indicator (0.072) increases the probability of a downward revision of price of about seven percentage points. Such an increase would be equivalent to going from the average department to the Lille or Lyon region. This corresponds to a very large effect considering that the observed unconditional probability of a downward price revision was 5.8% before 2020.

picture 3

To note: Effect of a change of one percentage point in the teleworking indicator on the marginal probability of a downward revision of the prices of buildings in the office segment compared to the other real estate segments for each quarter.

Are these effects compatible with a permanent deployment of telework, or do investors expect this change to be temporary? We perform an empirical exercise based on a simple asset valuation formula to measure the elasticity of telework vacancy rates implied by the elasticity of telework prices. It appears that county-level price declines are consistent with a permanent increase in county-level vacancy rates.

Consequences

These developments could have different consequences for the economy. In the short term, the decline in corporate real estate prices and the associated uncertainty may limit companies’ ability to finance through collateral (Chaney et al. 2012). The reduced demand for office space also creates imbalances on the supply side that the market will have to absorb. Rising vacancy rates in the commercial segment could eventually impact the residential real estate market, as the two markets are historically correlated. Future developments now depend on whether market players have overreacted amid heightened uncertainty or downplayed the future organization of work.

The references

Barrero, JM, N Bloom and SJ Davis (2021), “Why working from home will stick”, NBER Working Paper No. w28731.

Bartik, A, Z Cullen, E Glaeser, M Luca and C Stanton (2020), “How the COVID-19 crisis is reshaping remote working”, VoxEU.org, 19 July.

Bergeaud, A and S Ray (2020), “Macroeconomics of teleworking”, Banque de France Bulletin 213, article 2.

Bergeaud, A, JB Eyméoud, T Garcia and D Henricot (2021), “Telework and business real estate”, November.

Bloom, N and A Ramani (2021), “The donut effect of COVID-19 on cities”, VoxEU.org, 28 January.

Chaney, T, D Sraer and D Thesmar (2012), “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment? », American Economic Review 102.

Dingel, JI and B Neiman (2020), “How much work can you do at home? », Journal of Public Economics 189:104235.

About Aldrich Stanley

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