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June 2021 - Back to the Office: Work from Home and the Impact on the Office Market

When we founded Chestnut Funds in 2012, our investment thesis was that opportunity existed in the middle market space to manage funds in an institutional manner but with a focus on assets that typically did not attract institutional capital. We focused on property types that we had first-hand experience with - office, retail, industrial, and medical office properties. During 2021, our Viewpoints series will discuss the property types that we invest in, outline some of the reasons we make these investments, and share our view of what the future might hold. In this second installment, our focus is on office buildings.

At the beginning of the pandemic, many companies transitioned to a fully remote work arrangement for employees in response to health and safety concerns. Through creativity and investment in technology, many companies found, to their surprise, that employees were still productive in a work from home (WFH) setting. Now, almost 15 months since WFH began on a widespread basis, employers and employees are evaluating what the future workplace will look like, and investors are thinking about the impact of these changes on the demand for office space.

One of the most frequent questions we get from investors is about the impact on the office sector following the shift to remote work caused by the pandemic. The reflexive view, and an understandable one as analysis by Kastle Systems found that an average of 24% of employees in 10 major U.S. cities were back to the office as of April 7, 2021, is that the shift to remote work is likely to cause significant erosion in the demand for office space.

Early in the pandemic (mid-2020), 73% of employers that responded to PwC’s US Remote Work Survey reported that the shift to remote work was a success for their company. Six months later, as part of PwC’s second US Remote Work Survey, 83% of responding employers reported WFH work success, and over 70% plan to stick with some form of WFH or hybrid models even after the pandemic subsides.

The success of remote work is driving the evolution to hybrid models, defined as in the office a few days a week and WFH the remainder of the week. In short, in our opinion, it seems very likely that we are moving toward widespread adoption of a hybrid work model. In this Viewpoints, we look at the cases for WFH and hybrid models and the potential impact on the office sector.

WFH & Hybrid Models: The Employee Case

Now that companies have learned that many jobs can be done remotely, employees have embraced the increased flexibility. According to PwC, 32% of workers would prefer WFH exclusively. This cohort of individuals primarily consists of young moms, suburban workers, and long commuters. Based on survey findings, women, particularly those with children, were over 50% more likely to desire a WFH setting than men. Commuters are also benefitting from WFH programs with PwC finding that these individuals save up to 227 hours per year or 28 workdays by avoiding the work week commutes. Lastly, some employees have moved now that they no longer must go into the office. This flexibility is going to be difficult, and possibly unwise, to reverse after the pandemic.


Many employers and employees have also found increased productivity with a hybrid work model. Certain tasks that require focus without interruptions may be best done at home while the office becomes the place for collaboration, innovation, and community. The experiment that is playing out in real time is to determine the optimal mix of time in the office and time at home. Surveys are finding that employers often think that three or more days per week in the office is the right mix whereas employees lean towards two days per week in the office working best. In a Harvard Business School/City Square Associates survey, 61% of employees said they would like to work from home two to three days a week.


Employee Disadvantages

While WFH is positive for many employees, hybrid or remote work arrangements do not work well for everyone. The main group for which WHF is less desirable is young professionals. According to PwC’s survey findings, 34% of 18-24 year old employees prefer one day or less of WFH compared to 20% of all age groups. These workers may not have the resources suitable for a WFH arrangement (i.e., roommates, no suitable office space). Additionally, young professionals are likely to benefit most from office interaction, receiving instruction, and guidance from more experience colleagues. WFH has the potential to significantly impact this group’s ability to advance in their careers. On other end of the age bracket, based on survey findings, empty nesters appear to prefer going into the office as well. These individuals may not be as comfortable with some of the technology required for WFH or simply prefer face to face interaction. These two groups comprise a significant portion of the almost 21% of employees who would like to work in the office 5 days a week. Lastly, and according to the Harvard Business School/City Square Associates survey, 24% of employees with children at home would like to go back to the office full time, almost twice as likely as employees without children.

WHF & Hybrid Models: The Employer Case

Prior to the pandemic, the WFH model was initially implemented as a way to save on costs, but it has now become a health and safety precaution, employee benefit, and a way to recruit talented individuals from anywhere in the world. To enhance WFH and hybrid model success, companies are increasingly investing in technology which appears to pay dividends in terms of productivity.

Employer Disadvantages

While these potential benefits are important, employers seem to be struggling with full implementation of WFH. Pre-pandemic examples of employers who pursued a WFH strategy only to later reverse their decision include IBM and Yahoo. Recent examples of influential companies that have declared their intent to return to the office include Amazon, JP Morgan, and Goldman Sachs. The latter two noted in some of their public statements, the disadvantages a WFH program can have for younger employees. Moreover, additional reluctance to fully embrace WFH includes loss of corporate culture, scheduling difficulties, and data security.

The Impact of WFH on Office Demand

The reflexive reaction to the move toward WFH is that it will result in less demand for office space. Intuitively that seems right, and that possibility certainly exists, but we think there are other scenarios to consider. The results of PwC’s January 2021 survey suggest that the outlook is a bit more nuanced. Nearly a third of companies say that as a result of WFH policies they plan to make changes to their real estate strategy that will result in the need for less office space over the next three years. On the other hand, over half of the respondents think they will need more space.

With the diverging options described above, we have summarized three possibilities for future real estate strategies that companies will employ for their office space needs. Companies may:


1.  Reduce the amount of space they occupy as fewer employees come into the office on a daily basis;


2.  Stand pat as they realize WFH policies and hybrid models have not altered their real estate needs;


3.  Employ a hub and spoke model that includes a centralized headquarter with distributed offices in

suburban locations closer to where employees live.

Alternative 1: Shrinking office space

Some estimates put the reduced amount of space required by office users at 10-15% of current occupancy, which would likely be extremely negative for the office sector. This reduction is based primarily on companies’ expected desire to reduce their real estate costs, employees’ preference for WFH, and companies allowing many of their employees to go fully remote.

Our view is that there are several constraints on the wholesale reduction in companies’ real estate footprints. One is the impact on employee engagement, collaboration, and innovation. A number of employers have started to recognize this. Another countervailing trend to decreased office space demand is that employers will need to provide more space per employee for health and safety reasons. The trend toward more condensed office has reversed for some time due to productivity limitations of open-office floorplans. Additionally, as the use of the office changes to a collaborative meeting space, it is not clear that the result will be a need for less office space as the utilization cannot be perfectly managed. In short, setting up office space becomes more complicated and will require more thoughtful planning to accommodate hybrid work weeks. 

Alternative 2: Stand pat

Companies that embrace a hybrid work model must still provide office space for all employees if they wish to have all employees come into the office a few days a week. While the use of “hot desks,” unassigned desks that can either be reserved or occupied on a first-come first-served basis, creates some opportunity for reduced office space, but managing these shared spaces is proving difficult for employers and cumbersome for employees. Additionally, concerns over health and safety have been brought to the forefront over the last 15 months. And as the office becomes more collaborative on the days employees are there, some space may need to be reconfigured. In short, firms that follow a hybrid model with all employees at the office at least a few days a week may find limited options for reducing their office footprint.

Alternative 3: Hub and spoke model

In this alternative, companies centralize executive and senior management in a premier location while moving certain functions to outlying suburban locations. REI, the outdoor retailer, is a recent example of this. REI completed its new headquarters in early 2020 but never occupied the space. Instead, the company is looking to sell its office building, downsize the hub location, and build out smaller spoke offices throughout the Seattle market. This real estate strategy has several advantages for employers and employees. For employers, while it may not result in decreased total square footage, occupancy costs may decrease as employees are shifted to more cost-effective locations. These locations may also be better suited for employees and can be configured appropriately to create a better working environment.

The net effect of WFH on the demand for office space is uncertain at best. Our view is that the trend is likely to dampen office space demand to some extent, particularly in downtown locations, but that the office will remain the primary place for white-collar work. Typically, tenants have fairly long-term leases and have made significant investments in their space, so it may take time for the full impact to be known.

Many markets have extremely high levels of sublease space, indicating that some office users do not anticipate returning to the office or will be taking less space when they do. A company choosing to market their space for sublease while unoccupied strikes us as a totally rational decision. But, as we emerge from the pandemic, it will be instructive to see how much sublease space is taken off the market as office users evaluate their real estate strategy.

The impact of WFH on the office sector is likely to be driven by many of the operational issues addressed in this Viewpoints. As employers and employees adjust to post-pandemic life and take into account the lessons learned over the last 15 months, a primary consideration will be how the office functions for the benefit of employees and employers. Our global, real-time experiment in WFH seems to suggest that a hybrid model is the preferred path forward, and if that is the case, the impact of this shift in the way many employees work will likely create lasting consequences for the office sector.

Applying Insights at Chestnut Funds

So how will all of this affect Chestnut’s strategy for new office building investments? The near-term answer is that we will carefully evaluate all office opportunities in the context of these trends and that at face value we believe that office buildings in suburban locations are likely to be more appealing on a relative basis. To account for the impact of these trends, we plan to make our underwriting for office assets even more conservative. As other investors and lenders do the same, this could lead to declining values in the office sector. But as with many trends, dislocations in the office market could lead to investment opportunities to the extent that market perceptions of the impact of WFH exceed the reality of what is happening in the workplace.

Should you have questions regarding this Viewpoints or Chestnut Funds’ approach to middle market real estate investment, please feel free to contact Steen Watson at or (423) 822-8761.

The information contained in this newsletter is intended for informational purposes only and is not intended to provide personalized investment advice or to constitute an offer or solicitation to buy or sell securities or interests in any investment. The charts, graphs, and other information contained herein should not serve as the sole determining factor for making investment decisions.

This newsletter cannot be reproduced, shared, or published in any manner without the prior written consent of Chestnut Funds (“Chestnut”). Unless otherwise indicated, all statements and expressions in this paper are the sole opinion of Chestnut and are subject to change without notice. Predictions, forecasts, or outlooks described or implied are forward-looking statements based on certain assumptions, which may prove to be wrong, and/or other events, which were not taken into account, may occur. Any predictions, forecasts, outlooks, opinions, or assumptions should not be construed to be indicative of actual events, which will occur. The opinions and data in this newsletter have been obtained from sources believed to be reliable. Chestnut does not warrant the accuracy or completeness of such and accepts no liability for any direct or consequential losses arising from its use.

Investing in securities involves risk of loss and should not be based solely on marketing materials including the information provided herein.    Further, depending on the different types of investments there are varying degrees of risk.  Private Funds managed by Chestnut Real Estate Funds and their investors should be prepared to bear investment loss, including loss of original investment. There is no assurance that any specific investment or investment strategy utilized by Chestnut will be either suitable or profitable for your portfolio.  Chestnut does not provide personalized or customized investment advice, therefor you are urged to discuss your personal investment situation with the financial professional of your choice before making or changing an investment in a Chestnut offering.

Because of the inherent risk of loss associated with investing in any type of securities, Chestnut Real Estate Funds is unable to represent, guarantee, or even imply that its services and methods of analysis can or will predict future results, successfully identify market tops or bottoms, or insulate you from losses due to market corrections or declines.