Office space still a compelling investment — with risks

As pandemic restrictions ease and the economic reopening progresses, some companies are moving to a more flexible hybrid work structure — spending some days at the office and some days at home. Many firms have announced that hybrid work will continue long term, which has prompted a big question for real estate investors: Will this new structure lead to a permanent drop in demand for office space?

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Larry Antonatos, managing director and portfolio manager at Brookfield Asset Management, said he believes the answer is no. 

“While remote work can be effective in the short and even the medium term, it cannot replace human interaction in the long term,” said Antonatos in a Sept. 17 interview. “Both successful companies and successful employees value the power of in-person collaboration.”

Antonatos predicts three trends to emerge for top-quality office buildings in major urban centres. The first is that working from home will become a supplement to, rather than a substitute for, working from the office. 

“While remote work can provide flexibility for employees, office work allows for collaboration, connection and culture, essential ingredients for enterprise growth, risk management and employee development, particularly for newer employees and younger employees,” he said. 

Secondly, while in recent years there has been a move toward reduced space requirements with the rise of open-concept offices and co-working spaces, physical distancing measures will likely reverse the office densification trend.

According to Antonatos, office square footage per employee decreased from 425 square feet in 1990 to 150 square feet per employee in 2020. 

“With certain social distancing norms and health and safety protocols likely to endure, office square footage per employee will need to increase,” said Antonatos.

And third, Antonatos expects major cities will continue to attract talent. “Urbanization has been a powerful trend for centuries for one simple reason: commerce and culture thrive in the vibrancy of a great city,” he said.

With regards to market size, Antonatos believes major markets will dominate, particularly for global companies and deal-oriented businesses such as investment banking or mergers and acquisitions. He named Toronto, New York and London as examples. 

However, for market adjacency and market desirability, he predicts that smaller and second home markets will attract sufficient jobs and talent due to better quality of life, better schools, easier commutes or lower taxes. In the United States, for example, Antonatos said Austin, Texas and Nashville, Tennessee, as well as Greenwich, Connecticut, and even the Hamptons in New York “are prime opportunities for investment.”

In considering property quality within all markets, Antonatos said “the highest quality property will get stronger and stronger, and lesser-quality property will become less desirable and perhaps will become obsolete.”

Even so, Antonatos acknowledged that his optimistic, long-term view on office space may be contrarian. 

Office vacancies in Canada hit their highest level in decades last quarter as new supply continued to come into market while the fourth wave of Covid-19 slowed an expected return to work, according to CBRE Group Inc.

Additionally, being required to work remotely may have actually improved efficiency in the financial industry, according to U.S. research firm Greenwich Associates.

But for Antonatos, office real estate is still a compelling investment opportunity — though “it is not one without risk.”

“In the short run, Covid-19 cases may persist. In the medium run, the return of the workforce to the office may be slow,” he said. “But in the long run, we believe Class A office in major markets is essential to business, is essential to creativity, is essential to employee development and will be resilient.”

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