Episode 210: “Office Buildings: Will We Ever Go Back?” with John Scheurer

"Commuting to office work is obsolete. It is now infinitely easier, cheaper, and faster to do what the 19th century could not do, move information, and with it office work to where the people are, the tools to do so are already here. The telephone two-way video, electronic mail, the fax machine, the personal computer, and so on."

Peter Drucker (1989)

In 2020, over 30 years later, futurist and management guru Peter Drucker’s prediction came true with a bang. With the mandated COVID lockdowns, suddenly everybody had to learn to work from home. Office occupancy plummeted from 90% to 10% and we all learned about how to Zoom. Since then people are going back to the office, but occupancy still averages only 40 to 50% depending on the market, and in New York lower.

So what’s going to happen next? In this episode, I talk with commercial real estate expert extraordinaire John Scheurer about the prospects for office work and office buildings. John heads the real estate investing arm of Siguler Guff and was formerly CEO of Allied Capital after leading its very successful commercial real estate business.

“What COVID forced us to do is cram 50 years’ worth of commuting to the office to working wherever you wanted to work into two years” explains John.

One big beneficiary of the office exodus has been residential housing prices, which rose in some markets up to 50% fueled by people wanting to get bigger houses so they can have a home office.

With people not wanting to return to the office, demand for office leases has collapsed from 250 million square feet of office space signed for in 2019 to about 50 million in 2022.

Microsoft is reportedly giving up office in Seattle - a million square feet of space - and Reebok and hundreds of big companies have concluded to dramatically cut back as well. Allstate is getting rid of their suburban Chicago campus, because 75% of their people are now working remotely.

So this is an interesting story about how businesses and markets adapt to changing fortunes. Will empty office buildings be converted to condos? Will tech workers be lured back to work with promises of private offices? Did businesses need all those employees to begin with?

After all, Elon Musk fired 80% of Twitter’s so-called workers and its seems to be operating just fine.

One of the fascinating aspects of this story is how entrepreneurs take advantage of distressed markets and can turn despair into opportunity. With the prices of office buildings falling, is this actually a good time to invest?

John and I also talk about what’s happening to hotel and retail properties, and where the future is not as bleak as it looked just a couple of years ago.

I asked John where he would invest today and his answers were intriguing.