The Untethering of Work and Place: Four Key Takeaways for Real Estate Investors and Cities

Flex Index

The rise of remote work is having a significant impact on commercial real estate and has big implications for both investors and urban communities.

Dror Poleg is an Economic Historian and thought leader on the future of work. In 2019, Dror authored “Rethinking Real Estate: A Roadmap to Technology’s Impact on the World’s Largest Asset Class.” In that book, Dror made a number of predictions about how work would evolve that have largely borne out over the last several years.

Dror recently joined the Flex Perspectives podcast to discuss the implications for real estate investors and city officials of the untethering of work and place. Here are the key takeaways:

Real Estate Is Becoming More Volatile as an Asset Class

Real estate, once considered a stable and safe investment, is experiencing a significant shift in volatility as an asset class. In particular, the disconnect of real estate markets from economic output has introduced a higher degree of unpredictability.

Traditionally, property values were closely tied to the overall health of the economy, but with the emergence of financial engineering and speculative practices, prices are now meaningfully influenced by external factors, such as low-interest rates and investor sentiment. Dror explains, “the kind of linear relationship between economic growth, GDP growth, job growth, and actual demand for space in general and for office in particular is frayed.” This decoupling effect creates a more uncertain investment landscape for real estate investors, as asset prices can fluctuate rapidly based on short-term market dynamics rather than underlying economic fundamentals.

Remote Work and Automation Not Only Drive a Fundamental Shift in Demand for Office, but Also May Impact Other Commercial Real Estate Assets

The rise of remote work is already fundamentally reshaping demand for office space. As companies embrace remote work options, the need for large office footprints diminishes, impacting the value and appeal of traditional office properties.

The implications of improving remote work and automation technology are likely to have broader commercial real estate impact beyond offices. Advancements in automation technology may alter the requirements for logistics facilities, leading to potential volatility in the logistics real estate market.

The surge in online shopping and the growth of e-commerce have led to an increased demand for logistics assets, particularly large warehouses and distribution centers. As consumers embrace the convenience of online shopping, companies are seeking efficient and strategically located logistics facilities to meet the rising demand for timely and cost-effective deliveries.

However, with advancements in automation technology, the dynamics of logistics assets may undergo a transformative shift. Automation, including technologies like autonomous vehicles and robots, has the potential to revolutionize the storage, handling, and transportation of goods, potentially reducing the need for large physical warehouse spaces or changing the structure of them entirely.

As a simple example, Dror suggests, “if drivers need to make fewer stops because they're automated or because they drive different types of machines, suddenly you can have whole assets that are completely irrelevant.”

This transformation in logistics demand creates uncertainty in the underlying value of real estate assets, as investors and property owners grapple with how best to adapt to these evolving trends.

The Democratization of Remote Work Will Lead to Increased Competition for Specialized Talent Globally, Further Compounding Office Pain

As the global economy matures and businesses become more and more specialized, the need for specialized talent with exactly the right skillset increases. Dror explains, “as the economy becomes more specialized, you get a higher and higher return at matching exactly the right person to exactly the right task.”

The democratization of remote work has opened up opportunities for businesses to access a global talent pool to find employees with the perfect capabilities for their needs. Companies will no longer be restricted to hiring talent from their local job markets, and top candidates may have the flexibility to choose from opportunities across different regions or even countries.

This need for specialized talent further complicates the future for office in big cities. Employers become more likely to opt for small spaces in lots of different locations to attract and engage local talent vs. big office hubs.

The Knock-On Effects for City Economies Will Be Significant

The knock-on effects of the changing workforce dynamics and real estate landscape are likely to be significant for cities worldwide.

On one hand, the dispersal of businesses and talent could result in the revitalization of suburban areas and smaller towns as more people seek to live and work in less densely populated locations. These areas may experience an influx of residents, leading to increased demand for housing, amenities, and services. This, in turn, could spur economic growth and development in regions that were previously overshadowed by major cities.

On the other hand, cities that have heavily relied on office-based industries and commercial real estate may face challenges in reimagining their identities and economic models. Per Dror, “cities are currently grappling with a somewhat severe office crisis or commercial real estate crisis that has not played itself out yet.”

As companies decentralize their operations and embrace remote work options, it will challenge the traditional role of city centers as the primary destination for business activities. The reduced demand for office space in city centers will impact the property market and likely lead to a surplus of vacant commercial properties.

Policymakers and urban planners will need to reimagine the design and function of cities to accommodate a more distributed workforce and ensure that various regions can thrive in this new era of remote work. Urban planners and policymakers will need to address these challenges by promoting adaptive reuse of office buildings, incentivizing the creation of mixed-use developments, and investing in infrastructure and amenities that cater to a more distributed workforce.

In many ways, the future of cities will be shaped by their ability to adapt to the evolving needs of businesses and residents in this new era of remote work and automation.

Conclusion

The rise of remote work undoubtedly is reshaping the real estate landscape and workforce dynamics, bringing both opportunities and uncertainties for investors, businesses, and cities.

Real estate as an asset class is experiencing increased volatility due to its disconnect from economic output and the influence of financial engineering practices. The shift in demand for office spaces and logistics assets, driven by remote work and automation, challenges the traditional view of stable commercial properties.

As remote work becomes more and more ubiquitous and talent pools globalize, competition for specialized talent will further incentivize smaller, local offices vs. large corporate hubs. The implications for cities are profound.

Some smaller cities will benefit from an economic wave as remote work disperses businesses and talent to previously overlooked regions. However, other major cities that are disproportionately exposed to office-based work may grapple with an office and commercial real estate crisis as demand shifts.

Urban planners and policymakers must adapt to this changing landscape by reimagining city centers, promoting adaptive reuse of properties, and fostering sustainable, inclusive environments. In this ever-evolving landscape of real estate and the workforce, staying agile and forward-thinking is paramount to navigating the complexities of the future successfully.