The Post-Covid Era: How Remote Work is Shaping Real Estate Markets

The COVID-19 pandemic has left an indelible mark on our work habits and, consequently, the real estate landscape. One of the key lessons we have learned is that remote work is not just a temporary fix; it is here to stay. With the rapid development and widespread use of online meeting platforms and the dissolution of stigmas around working from home, we have witnessed a significant shift in how and where we work. Five-day office routines are no longer the standard. Now, it is quite the opposite, with many of us working remotely two or three days a week. The impact of this transformation on company and individual profits remains a matter of debate, but it is certain that remote working has left a lasting imprint on real estate markets. For now, the most evident effects are seen in rising vacancy rates in office buildings. However, it likely that working remotely will continue to influence various property types in the long run. In this blog post, we will explore how the reduced cost of commuting to work could significantly reshape regional development dynamics.

The distinguishing feature of real estate is that it is immobile. This means that property values are not solely determined by the attributes and locations of the buildings themselves but also by their proximity to other properties and amenities. People are willing to pay premiums for well-located properties that reduce their travel time and effort to reach desirable destinations. This is why property prices tend to be high in metropolitan areas, where easy access to numerous amenities is a given. Among these amenities, work is a pivotal one that plays a central role in our daily lives. Therefore, people naturally consider the proximity of their workplace a critical factor when choosing where to live. However, now that working from home is a viable option, the importance of living close to your workplace has diminished.

To illustrate this point, let us adapt the classic "Weber Location Triangle" to a personal location decision. In this example, we will consider an individual who bases his optimal location on minimizing transport costs to three key amenities: his job, his family, and a leisure destination. The left figure represents the pre-COVID-19 situation, where the optimal location falls between these three amenities. However, given that the job requires more frequent visits than the other places, it carries greater weight in the location decision. As a result, the optimal location leans closer to the workplace. Now, in the second figure, we introduce the post-COVID-19 situation where remote work is an option. With the reduced need for physical office visits, the importance of the job location decreases. Suddenly, the optimal location is one that is closer to the other amenities.

Of course, real-life scenarios are not as simple. In reality, countless factors affect our location decision, and they each differ per individual. Amenities are substituted, and travel costs are not isotopic. Moreover, relocating is not free; it only happens if the benefits outweigh the costs. Nonetheless, the central argument holds: reduced work-related travel changes people's location choices.

Now, when a single person undergoes a shift in location preference, it is unlikely to have much impact on market outcomes. However, when entire groups of people do so, it will. We have already observed this in action. The pandemic prompted a migration from urban to rural areas as employees no longer needed to be near the office. This shift was further accentuated as cities temporarily lost many of their attractions due to restriction measures. Although urban amenities are accessible again, the ability to work from home remains. Rather than moving to the city predominantly for work, people now increasingly do so for the broad range of offerings it provides. In the case of the USA, this has led to an exodus of city centers to suburbs. A phenomenon coined as the “donut effect” by economists Arjun Ramani and Nick Bloom. In the case of Europe, effects might be less outspoken as amenities tend to be centralized in historic city centers. Nevertheless, also here we might see a shift in demand from cities that offer jobs towards places that offer other amenities.

So what does this mean for future developments? First, it is important to recognize that these changes take time. Individuals will only consider alternative locations when it makes sense in their lives - typically when they are already planning to move. To see significant market effects, a critical mass of individuals must reach these transition points. Second, markets are resilient and adapt to new opportunities and challenges. For example, to stimulate employees to go to the office, companies might invest in buildings that offer more than just a working spot. Doing so might add to the weight of being close to work again. Third, interactions of individual decisions lead to complex compound effects that are incredibly hard to predict. Similar to previous innovation that reduced transaction cost, remote working can alter centers of economic gravity and affect agglomeration benefits. It is therefore senseless to provide hard conclusions upon how urban developments are going to happen. Nevertheless, we can draw some insights from previous developments and provide stakeholders with key considerations when contemplating the (near) future:

1. Reduced commuting costs have made remote areas relatively more attractive. This potentially drives up rural and semi-urban land prices.
2. If employers want employees to keep coming to the office, they should provide compelling reasons to do so, beyond just offering a workspace.
3. Office substitution allows employees to reconsider their location choice. They might opt for places with better overall amenities.