Over the past few months, millions have switched to working from home. Most probably expect this to be a temporary change, but what if a return to the office remains impractical for the foreseeable future?
With public transport increasingly overcrowded, home working one or two days a week was becoming more common in any case. But Covid-19 restrictions are accelerating a lot of changes that were already happening in our societies and economies—a move away from office-based work feels like one of them.
This would have big implications for property markets and those who invest in them. If employers conclude they can keep many staff working largely from home for the long term, demand for office space will drop, especially in expensive city districts that depend on people commuting. That would drive down rents and capital values, hurting office landlords, which include many pension funds and insurance companies. These large investors have moved heavily into prime office property over the past decade as yields on their bond investments have fallen. Serious problems in this market would be a nasty blow.
Alongside retail space—already in deep trouble—offices are a major element of property as an asset class, and depressed returns here will make it harder for pension schemes to generate the income they need to pay pensions and for insurers to hold down premiums and cover claims.
Banks will also be concerned. Landlords depend on debt finance to fund their investments and banks provide a lot of the commercial mortgages used to purchase office properties. It is also worth remembering that historically, commercial property lending has tended to get banks into bigger trouble than most other things because the market is so cyclical. A structural decline in demand for office space would hit banks’ balance sheets, forcing write-offs and provisions that will limit their capacity to make new loans. This is exactly the problem the government and financial regulators are now trying to head off.
More home working is also likely to affect residential property markets, especially in big cities where commuting will decline. Instead, I would expect to see demand for properties in smaller towns and rural areas benefit as more people take the opportunity to live further from cities for a better quality of life. By the same token, larger homes that can easily accommodate offices for several occupants are likely to be sought after.
This is all speculation, of course. But it is hard to escape the suspicion that many working lives have changed for good—and with them, our investment landscape.
