Opportunity Space Episode 1: Lost in Space

 

In Cresa's first episode of the Opportunity Space Podcast, we had the pleasure of speaking to Stanford Professor, Nicholas Bloom. View the full video and transcript below or listen on Spotify. 

 

 

Introduction

I’m Cresa CEO Tod Lickerman and I’m Craig Van Pelt, Head of Research. We are cutting through the chaos to shed on how businesses of all sizes can create opportunity despite the very real and changing market conditions we’re seeing in today’s business environment. Let’s get started. This is opportunity space.

 

Tod Lickerman

Welcome to Opportunity Space. This episode is an exciting one. This one, Lost in Space. This is a big, big topic in our world, right?

Right now, we find ourselves lost in a tremendous amount of available office space, right? We know a lot of it has to do with change of use, and today we're going to unravel the why behind the shift in the use, shift how people are using office, and explore what it means to the future of work. I'm super thrilled today to be speaking with Nick Bloom, a Stanford economist who's been studying remote work for over two decades and has some great, great insights. But first, Craig, fill us in on some statistics and get us started on where we start from.

 

Craig Van Pelt

Yeah. You know, this really is an interesting time and landscape was going on. There are a lot of paradoxes. We're witnessing a surge in office occupying jobs. In fact, we've seen, 1.2 million added jobs since the pre pandemic peak for, in particular for knowledge worker jobs. Yet at the same time, office vacancy rates are really really jumping right now. And we're in the midst of this really weird economic scenario where demand is dipped, but the workforce is growing. And the office market has shed about 200 million square feet of occupied space, while simultaneously adding another 127 million square feet of sub-lease space. So that is a lot of additional space going on the market at the same time where jobs are being added.

So, at some point, where do these things come together and where do we level out? So that's, what we're really excited to talk with Nick today about.

 

Tod

Fantastic time in the industry. Challenging, but loads of opportunity as well. So welcome, Nick. You have a lot of expertise in this area. You've developed a real data, data insight view on work styles and nature of work and what's happening.

You know, give us an intro. How did you get hooked on this? Give us your background and then, and then start filling in how you look at the world of work.

 

Nicholas Bloom

Sure, so thanks very much. You know, we've been, Cresa and I, we've been nerdy talking about office data for a while now, so it's fantastic to be here. So, I got interested, because I'm actually one of four kids, and both my parents work full time. And I mean, I'm 50 now, so I was growing up in the 80's. And back then, they would sometimes work from home, and it was just horrible. When I talk to them now, they're like, there are no computers. I mean, imagine what it was like. It was carrying pieces of paper, just dreadful. And we've seen computers came along and then the internet and then cloud and video calls, etc. And what from home was rising, it was doubling every 15 years, but just from such a low level that no one really noticed it. And then the pandemic happened, and it looked like the pandemic has kicked it up 5x, which is almost 50 years of additional growth. So, it's just been, it's like one of those rocket boosters where your body's thrown to the floor where it's propelled up. And then it stuck.

The amazing thing is that 2023 was the great leveling off. So, work from home was falling, 2020, 2021, 2022 is the pandemic waned, but it's flat. And it looks like it will be flat for a while. So we are now in the new normal. It's a perfect time to take stock of what that new normal is for office demand for firms. I'll stop there, but that's how kind of I got interested in this.

 

Tod

So, you talk about in your work three major work styles, obviously work from home. So, I'd love to hear more about where does work from home fit, but then also dedicated and hybrid. Just give us an overview of the types and then dive in and explain them from your point of view.

 

Nick

Sure, the biggest, easiest split really is the three groups. One is about 60% of people have to come into work every day. They actually mostly don't live in the offices. They mostly work in factories, shops, schools, hospitals, et cetera. That's the biggest group. Then the remaining 40% are mostly, at least pre-pandemic office based. So, of the remaining 40%, 30% are hybrid. So that's probably most people listening actually. That's managers, professionals. I teach at Stanford, most of my students fall into that MBA subset.

They are mostly hybrid, typically working in an office when they're in work and then typically at home actually when they're not. And then there's a final 10% that are what's called fully remote, where they work mostly at home. That is a segment actually that's probably gonna see the most flux in the long run, because eventually they're at some threat actually of offshoring an AI. But for the office world, hybrid is really the big one to focus on. That is pretty stable now at 30%. And just to put numbers on it, there are almost 200 million Americans working, just under. So, 30% of that is about 60 million Americans are hybrid, as in typically they're coming into the office three days a week working from home.

 

Tod

And so, you hit on something really interesting. Let me go back to it. Remote work, right? There are many, many more positions that can be remote. And a whole category of those, that frankly probably should be, right? And when I look at what our clients are doing, and what we're doing, there are some jobs that are just done as well, if not better, remotely, right? And that's it. But you just brought up something interesting. You said they're at risk. Tell us about that.

 

Nick

Yeah, so one, you know, we've been talking offline, but I just restated here that we know that class A, nice office space has tended to do pretty well and nasty office space hasn't. It's also our thinking about that, oddly on office by office basis. So, I used to work at McKinsey in the finance industry in the UK and various, you know, I've had a pre-academic kind of commercial working life and I remember in all of those offices, you'd have basically the high paid folks at the offices tended to be around the edges with the windows and you know, nice. And then the folks that were medium and lower paid often support staff, think IT support, payroll, you know, some basic HR functions, call centers, with data, will be in the center. Now those center activities are increasingly going fully remote. Because if you're doing data entry, you know, you don't need to be in the office. And some execs say rightfully, well, they're a bit more productive in the office. That may be true. Let's assume they're 10% less productive than their remote. The issue is they may be 40-50% cheaper because you don't have to pay for their office space and also you can hire them in a low cost place in the US or maybe internationally.

So that means thinking about offices going ahead. It's not just class A offices, it's kind of class A space within class A offices that's particularly important. And those central parts of offices with no windows, I don't know who's going to be sitting in them as much going forwards. And I kind of repurposed them maybe to amenities, a little bit more gym space, maybe larger space. I mean, I'll throw it back to you, but actually it's interesting. Even in a very nice office, it's less clear who's going to use the central parts of it, which also changes the types of buildings, taller, skinny ones, rather than big, massive square footprint.

 

Tod

Let's come let's come back to that. But let me ask you this so on the hybrid in your work you've done some real thought about what hybrid means and how many days a week that means, fill us in on that because that has real ramifications for net use of office space. Obviously anybody can come in anytime they want we can shed some space. But what have you found in terms of what hybrid really means?

 

Nick

I'll give you some rules of thumb. Some of this has more science, some has less science around it. I think on the more science, I have a paper that is going through journals, and it's well known by now, about showing the hybrid. If you're coming in three days a week, and it's well organized, so everyone in the team is coming in on the same three days. In this case, it was Monday, Tuesday, and Thursday. It looks like productivity is about flat. We took 1,600 graduates. These are people who are in IT coding, finance, marketing, and classic office activities, graduates and third were post grads, had masters or PhDs, so these very high end. We randomized by even on our birthdays, whether they work from home on Wednesday, Friday. So, what you found is first off, no effect on performance, totally none. No effect on promotions, lines of code written, performance reviews, text, nothing. And when you interview them, they say, two days a week at home. There's some ups and downsides. You know, it's quieter. I have less commute, so I'm more energized. On the other hand, it's less face to face time. It nets out zero. The thing we did find is quit rates were down by about a third. So, my read of this is probably three days a week is enough connectivity if it's well organized to get people into the office. So that to me, when I talk to companies, the typical style, the kind of vanilla. Is going to be something like Tuesday, Wednesday, Thursday, people come into the office, Monday, Friday, they work from home. One implication is, you know, if you're in office real estate, in some ways it's quite a good implication that you probably aren't seeing a massive reduction in space. Now, you can say, I often get, you know, exacts, particularly CEOs, they're kind of angry with their real estate folks saying, look, why can't we reduce space by having people come in different days? The problem is just think about the organization of a typical company.

It does, you know, there are some real problems about saying, okay, team A, you come in Monday, Tuesday, Wednesday, team B, you come in Tuesday, Wednesday, Thursday, team C, etc. So, what are the problems of that? One is in most organizations; jobs don't naturally fall into teams. There's matrices and people work cross teams, and you know, there's a reason the company exists because people work together. If you're just silo teams, you'd have lots of, you know, subcontractors. So that's problem one.

Problem two is clean desks. You actually have to clean your desk totally, take off pictures, everything else, clean the drawers out. That's never that popular. Problem three, is somebody has to have Friday. And you know, Friday is the day that everyone really wants to work from home. And one company said, well, we thought we figured it out because we rotated every six months. So, if you got Friday, you get six months on, six months off. After the first rotation, it was chaos because all these people said, you know, you've totally messed up my childcare. I know, how can I deal with this? So it turns out, at least for now, the easiest solution is really just to say the three days are the same for everyone. To point out, that isn't that radical because if you think back to 2019, we typically worked 40 to 50 hours a week in the office. There are actually 168 hours in the week, but everyone just combined, you know, coordinated on Monday, Friday, 9 to 5. So even pre-pandemic, you could have said three shifts, one weekday's day, one weekday's night, one weekend. But yeah, I've never heard of a company doing that outside really manufacturing.

So it looks like I think the future is actually not a massive reduction in space, a limited reduction in space because hybrid is concentrating on the same days. To the extent space has been reduced, some of it's from firms just going fully remote and some is what we talked about a little bit earlier, those support functions typically in the windowless office places in the center. So I could see the future of the office is maybe 15% smaller, you strip out the central nasty, the less nice offices with no windows, but the window type offices around the edges and higher quality stuff, the space is almost the same.

 

Tod

Yeah, so I can support that. What we see is same day, doesn't have a net huge reduction in itself, but the type of space you need is different, which is what you're saying. You know, you need spaces that are much more drop-in friendly, much more meeting friendly, free address, not dedicated. So, it's not as simple as, well, let me just give back, you know, 15% of my floor space and keep the design the same way. You really have to refit it to the more contemporary style, which is much more about convening. So it has implications for, you know, the, the installed office space, because it really does need to be reworked. It needs to be reworked to the kind of space that can handle effective hybrid and we're seeing that, you know, we're seeing that where, you know, maybe, maybe my space is smaller, but I have to rework it for folks.

The other thing is an example is, or ramification is you need to have the kind of multi-generational and multi-level people together in the office. And so, you may have some groups that want to be in the office, others may not as much, but the organization needs them. And that is where the organizations, we haven't seen a ton of effectiveness saying, everybody's just got to be in, because I'm the CEO and it's five days, you have to be there. But we have said, you have to be in three days a week because we need you there. We need you mentoring. And you have some interesting insights onto younger folks and how they look at office when they look at new positions.

 

Nick

Yeah, you're exactly right. So, the biggest challenge is actually normally middle managers. So just to look at the demographic data, if you, I mean, we've surveyed and we have various different data sets, you see pretty robustly people in their 20’s actually typically want to come in three, four days a week. So, I have lots of students at Stanford, you know, my oldest daughter's 20. I see this very upfront, you know, and personal, they say, look, I want to be mentored, I want my career to succeed. So, I that, you know, typically best done mostly in person. I want to be social. I don't want to be stuck at home all day. And finally, these folks are sharing apartments. There's like five of them in an apartment in New York. No one wants to walk from home in their bedroom. So where are you going to go? I mean, it just turns out the office is a better place. So, people in their twenties, they want to walk from home Friday, maybe one other day.

The issue is often, and people who are 50 plus often are in that situation too, because they want to return to the office. It's thirties and forties with young kids moved a bit further out. And the challenge is, if you look at 20-year-olds, who are they getting mentored by? They're getting mentored by typically their managers who are 30 to 40’s. And so, yes, there is a bit of a change. When I talked to a law firm earlier in the week, it was so classic. They said all the associates at the entry level, they're young and hungry, they wanna come in. They wanna get mentored and learn off the partners. It's the partners that actually are saying, look, I've been doing this job for 15-20 years. I don't need to come in anymore. I can deal with the clients just coming in one day a week and going to client offices. The managing partner was saying, well, no, because your job is not just winning business and providing legal services. It's also training the next generation.

One thought is on mandates, which I probably, if you're aiming at three, would be moving towards like not mandates, not extreme, but kind of the same way you'd monitor 2019 attendance. The other thing is, if it's an issue, include mentoring and what in McKinsey world used to be called, I think, you know, developing talent into appraisals.

So Tod, if you're, you know, my manager, and I have that as one of my four objectives, I'm going to pay much more attention to coming in. You know, if Craig is, I don't know, Craig's working for me, I'm aware that he's going to be much more positive. I sit down and have lunch with him once a month and see him, you know, on in person day. So that is the other way around is really fix the ultimate issue rather than mandate attendance.

 

Tod

That's a great point. You're right. That is, cause that is, that's what's needed, right? It's needed in the evolution of, in the life cycle of every company. Let me ask you this. During the pandemic, many people physically relocated, right? Driven by housing prices or lifestyle or elder or childcare. Just how pervasive were those trends and do you think that persists or how does that factor into everything?

 

Nick

Yes, it looks like quite surprisingly it's persistent. So, I'm gonna throw them back to March, 2020. We're all sent home. And I like everyone else assume, thought it was gonna be temporary. In fact, I canceled my two classes in Stanford as teaching. Both of them, I counseled them and said, I sent them an email, you know, I kind of this is such a classic email. It said, I'm not gonna do Zoom teaching. I'd rather do it in person. So, when the lockdown ends in two weeks, I'll see you back again. And you know. I mean, it took two years in that class. Unfortunately, they missed the last two weeks and had to make it up years later and just apologize.

So, what happened is Americans in their millions, or maybe about a million actually, totally have very good data from the United States Postal Service, moved out of city centers to suburbs. They didn't go to Hawaii mostly. They mostly went to the suburbs of the same big city. So almost 60% stayed within the same metro, just moved out. And the reason's kind of obvious, you gotta come into the office two, three days a week. You still gotta be close, you just don't have to be that close. The big question is, would that stick?

Much like working from home, it looks like yes. I mean, astoundingly, it has stuck. I mean, another way to look at it is yesterday, I was up in Gusto, who do a lot of payroll, and they have incredible payroll data. You can look at the distance of where somebody lives to where they work, and the payroll data is very accurate on this. And you see Americans have roughly doubled the distance they have in their workplace between 2020 and 2023. It's stuck. It's now stable. So, we call it the donut effect. It affects many things. So, it affects residential. So, suburbs have clearly seen valuations and rents go up fast in city centers. You see that in Zillow data, particularly in big cities. It affects retail because there's more retail expenditure in the suburbs, including leisure. So, things like gyms in the suburbs are doing well, gyms in the city centers are struggling. And it also, in a way, affects office space a bit less, but some office space demand is pushed out to suburbs. Mostly what I hear is companies are still saying, look, we want the HQ in the city center because when people come in, but some of them are actually even moving the HQ’s out to some more suburban locations. And yes, that is permanent. It's totally permanent as of end of 2023.

 

Tod

Permanent and it really does feed into hybrid, right? Because if you're twice as far out, you know, three days a week is gonna be more attractive than four or five. Let me ask you this, you've looked at the economic value of flexibility and what have you found there in terms of pay versus flexibility?

 

Nick

Yeah, so this is why hybrid has become so dominant. The bottom line is it's profitable for firms. We're in a capitalist economy. I'm an economist, I believe, in making profits. Probably like everyone listening, I have a pension and everything. I want companies to make profit. So why is hybrid so successful? Point one, productivity is about flat, it seems on average. So, there's no downside. Then why on earth would you do it? The upside is exactly as you talked about, recruitment and retention. So, the two best numbers, one is we've surveyed tens of thousands of Americans. They value it about the same as an 8% pay increase. So, we asked them, how would you value working from home two to three days a week? It's a two-part question, but the average is about 8%. So, is that a lot or a little? I mean, it's pretty material. When I talk to recruiters, they say, look, it used to be pre-pandemic, the big two perks were healthcare, plans and pension. Now that's the big three, healthcare, pension, and work from home policy.

The other number I have is from the randomized control trial, where we randomly offered some employees hybrid and others not. You saw a 33% lower quit rate for those with hybrid. So, I would say for, you know, the numbers on cost of quits are high. So, typically the valuations, every person that quits, it costs about 50% of their annual salary in terms of recruitment and retention and retraining somebody new. So, hybrid is hugely profitable because it effectively means you have to pay people 8% less in order to have the same rate of retention.

 

Tod

Well, and in this time where we have such a war for talent, right, and cost pressure on talent and ability to recruit, retain and engage is huge and on the minds of all the C-Suites, 8% is huge, especially retention. That's a big number, right? That's probably one of the strongest reasons for persistence in my mind.

 

Nick

I think it's profitable. So, hybrid is profitable. Interestingly, fully remote is profitable for a different reason, and certainly not for everyone. So, I think of Stanford, my own organization, we have maybe 10% of people fully remote. For a certain subset, think IT support, call centers, payroll, kind of relatively repetitive tasks, or maybe some individualistic things like writing chunks of code. Fully remote saves you enormous costs because you don't have to pay for office space and of course the wage rates are a bit lower. Some startups are involved in hiring these folks down in Brazil or Argentina and they're dramatically lower. So yes, it's very much a cost play. The other trick, there's another just kind of fun thing I've heard from a few companies, is this fully remote couple of weeks or month. So, I don't know if any manager is thinking out there.

Another thing, if you have quite a seasonal business. You may have a month, let's say August or December, where things are so quiet. Traditionally people come in, they kind of goof around in the office. You can instead say, look, we're just going to close the office down. We're going to be fully remote. Now of course, you know that in reality, folks are not going to work full hardness during that fully remote month. But on the other hand, they weren't anyway. And it's hugely appealing to a lot of staff. So, it's another kind of recruitment or retention tool. You're looking at two companies. One is hybrid and lets you work remotely for a month. You're like, wow, that's amazing. I could spend one month a year in Hawaii or my cabin or wherever it is. So that is another thing. It only really makes sense to think of your seasonal and you have a quiet month anyway, but it's another thing I'm seeing creeping in.

 

Tod

Fascinating, fascinating. So, look, some of the things you pointed to really spell long-term effects on cities, right? The doughnut effect, people move further away, less traffic in cities, right? Maybe three days or stronger. Give us your thoughts on that.

 

Nick

So, yeah, I mean, I recently put something out in the Wall Street Journal saying cities, you know, there are losers, just to be clear. There are three groups. One is people that own office and retail real estate in the very center of big cities, medium and smaller cities. That's actually okay. It's very big cities. Think of Washington, D.C., you know, San Francisco, et cetera. Another group are city mayors themselves. So the most extreme is probably San Francisco. It turns out due to kind of a quirk of American history, American cities are tiny. So, I don't know if people realize that, but London is a massive, where I was born, is a massive thing. And you know, Sadiq Khan, his area of London, stretches all the way out into things that I would think of the outer edge of the city, and you know, an hour and a half commute. San Francisco is only 50 square miles. The airport and Golden Gate Bridge are not actually in San Francisco city. Why it's relevant, because if you're London breed, and you have folks move across the bay, the East Bay or North to Marion, a little bit South, you know, around the airport, they no longer live in your city, and they don't pay taxes to you.

Cities are seeing big drops in budget. That's leading them to cut services. Think of police, education, etc. That is very problematic for the long run. That is a challenge. Think of New York in the late 70’s. US cities need to get costs under control. It's going to be tough, honestly, very tough negotiations with the unions being more efficient. The private sector is used to this every time there's a recession. I used to do cost-cutting exercises in McKinsey. They're not popular, but they're necessary. US cities, unfortunately, need to go through that because cutting services, cutting police and education, it's a pretty terrible long-run policy. So, I think they need to get more efficient, but it's hard, it's honestly hard. And in fact, if you look at municipal bonds, they've traded at a lot lower rates with far higher credit risk because people are concerned some of these US cities may just default.

 

Tod

Yeah, it's interesting. We have a podcast with Richard Florida, an urbanist on a great, great podcast when we went deep into it. And there is a reimagining of cities. And you can look to the great cities around the world to see what the formula is. So, tune into that podcast for opportunities.

 

Nick

Richard is fantastic. I've actually been talking to him a lot recently. I totally agree. He's a big urban supporter. I'm not an anti-urbanist at all. I think we're very aligned. Think he's have a fantastic future. They're like a boxer that's just taken a heavy slug to the face that will recover, but they're staggering a bit now.

 

Tod

Well, they're very homogenous. You know, the CBD as a CB, you go to many, you know, great older cities, housing and the fabric of life is very intertwined with office and other work. So, this idea that we could, you know, in some ways a CBD is a little bit like the mall. We concentrated everything into one use and when one use takes a hit, you know, it takes a while to reposition and you realize there's a, there's a diversity in the fabric and makeup of cities that makes them successful. And that's, I think.

 

Nick

I mean, I saw an interesting data. I've been working a bunch with MasterCard, actually, and one of the interesting data trends they're showing is restaurants in the center of big cities are seeing a much greater shift towards spending in evenings rather than lunchtimes. And in fact, it seems very perverse. There's a group of workers that work from home during the day, and then in the evening get kind of antsy, want to get out. Sometimes they eat in the suburb. Sometimes they're going into the city in the evening. So, you know, there are people that are commuting in, they're leaving the suburbs at kind of five or 6 p.m. on a Friday, going into the city, eating out, going out and then coming back again. They're still commuting, they're not actually commuting for work. And it kind of highlights increasing focus on what I call leisure and consumption in city centers. Not, you know, that's never gonna be the dominant activity, but that's gone up. And that's what needs to replace some of the lost activity from office and actually retail that's related to office.

 

Tod

Oh, I mean, look at it. Look at the great cities of the world, the big, deep cities, the London, the Paris, the New York city. You go in, they're destinations, right? The flow into town is heavier maybe at night than it is out of town, right? Just because they have so many diverse uses going on. Fantastic attractions.

 

Nick

Yeah, this is why I think, by the way, good policing and dealing with crime is critical. One thing that's incredibly sensitive is crime rates. So that was another issue that happened in the pandemic, that street crime has risen a lot. And so, this is why coming back to how you rejuvenate cities, you need to get crime rates down because the other activity. Office is sensitive to crime. Evening entertainment is even more sensitive to crime, actually even than offices.

 

Tod

Excellent point. Talk about how the US compares or how the rest of the world compares to the US. What's it like outside the US in work styles, return to work and the topics we're talking about?

 

Nick

There is strangely a global split. You can probably hear I'm British or occasionally people confuse it with Australian for the purposes of this podcast. It maybe doesn't match actually because it turns out we've surveyed almost 40 countries around the world. We've also looked at occupancy data. What you see is English-speaking countries, so think of UK, US, Canada, Australia, New Zealand have the highest levels of work from home. They are typically about, for graduates, this is they're typically maybe one and a half to two days a week. There's then a middle group, which is Europe. Think of Germany, France, Italy, et cetera, which are more like one. South America for graduates, again, is looking relatively similar. And then Asian countries, South Korea, Taiwan, Japan, et cetera, are looking more like half a day. Now, we have an ongoing research study which is going to give you the preliminary findings, which is why is this?

And there's a bunch of different explanations. One is income doesn't really work, because South Korea and Japan is pretty wealthy and they have low work from home rates. The factors that we went through, a bunch of them, the factors that seem to matter, the most important factor seems to be culture. So the various cross-country measures of culture going all the way back to Hofstadter, really around what's called individualism. So, the classic concept is some countries like the US tend to want individuals to make their own decisions. So, a classic American company is, you know, will give you some determination. If you screw up, you're out, or you're gonna have a big deduction in your pay, but if you do well, you get rewarded. In more Asian countries, there's more command and control and less self-determination. It looks like that doesn't go as well with work from home. That's one factor. The other couple that we see, less important but still there, is population density. If you have dense Asian cities, it's harder because people's apartments aren't as nice to work from home. And the third is length of lockdown. Interestingly, places with very severe long lockdowns had larger permanent shifts to work from home, and I think people just got used to it. So, the US is in some ways ground zero for this. It's very individualistic. It has a lot of population, very low population density, and it had pretty long lockdowns actually. And so, it shifted to a very high level of work from home, similar to Canada, similar to the UK.

 

Tod

So, we're seeing the most extreme of this.

 

Nick

Yeah, I think the US is out ahead. So, as I've worked on management for many years, the US leads the world honestly in management practices. It had some of the first business schools, World War II onwards, it's companies where global giants, et cetera. And I think this is another area. My guess is the rest of the world in 20 years is gonna catch up with the US. I think what's holding back Europe, particularly Asia is kind of traditions or this culture that isn't so well- kind of match with work from home.

Another reason, by the way, for optimism in terms of if you want work from home, you're out in Asia is government policy. So it's kind of getting off the track a bit. But one of the big issues for Asian countries and southern European countries is incredibly low fertility rates. So, their populations are now entering into a period of very rapid decline and very fast aging. And that's a real, real problem for many reasons. Looks like one of the best solutions to that is encouraging work from home, because it makes it easier to bring up kids. So, if you have government in South Korea, they're gonna start pushing pretty heavily towards promoting this as a way to increase fertility rates and try and address some of these issues. So, my guess is the rest of the world is gonna catch up with the US, Canada, UK, rather than the other way around.

 

Tod

You know, that's a great point because the change from the pandemic through to now is one of the benefits of the flexibility is elder care and childcare, right? And you're just closer, you're just closer to the family in times when either you want to be or you need to be.

 

Nick

Yes, absolutely. One nice study on that looks at the American Time Use Survey and finds that Americans that work from home spend about 40 minutes more a week with their kids, which if you think of all the negatives from the school lockdowns, and as a parent, I've certainly seen this, one of the longer run benefits to reverse some of this is just more time with parents with kids.

 

Tod

Fantastic. And look, all that feeds into the war for talent, right? I mean, this, at the end of the day, we found in our business, real estate and supporting, especially the office side, it's about enabling, attracting, retaining, engaging, and driving productivity of talent. It's not this expense that's there to be, you know, controlled as much as it is, but it is really about what is it there for?

And we, the pandemic exploded the whole thing and now we're putting it back together and it's just fascinating to watch, fascinating.

Nick

Yeah, I mean, the reason to have, again, why do you have an office all together? The reason seems to be people are much more creative when they're face to face, not much more. They are more creative when they spend at least some of the time face to face. There's actually a famous paper in the Proceedings of the National Academy of Sciences that talks about bursting. And it's a great experiment. It takes three groups that are kind of randomly generated. In group one, people are asked, they're given five hours and they're asked to come up with a new product for this, a new use of this product. They're all put in the same room for five hours. Group two, they're all sat individually. Group three, same room for an hour, individually for an hour, same room. Turns out group three is the most creative.

And the reason is you kind of need some time together to energize and bounce ideas, but you also need some time alone to reflect and think. And so, offices in a hybrid kind of gets you that. You want some time in together to bounce ideas around, but you also want some quiet time. So, that's reason why. I think the other reason we discussed is offices are important for mentoring and learning. So, you need to, you know, it just seems watching what people do, copying them, sitting around them. I was with the company yesterday that was talking about the outbound sales team and said the learning is so much faster in person because I'm on the phone or on Zoom and I just, you know, I'm between calls and I notice what the person to the left or right is doing and how they're successful and I just mimic them. You think about how, you know, how kids learn from their parents is by mimicry. And it's the same in terms of learning in the office. And you kind of miss that when you're all set at home.

 

Tod

Well, great. Well, look, Nick, always a blast to talk to you. Fantastic insights into the subject.

 

Craig

Can I ask one question before we go? Um, you had such a great conversation, but you know, Nick, we've been talking a lot about existing jobs. What, what are the, what have you seen in terms of new job postings and is remote work being highlighted within recruiting or is that just, you know, all part of the current landscape right now? And it's just, I'm just curious how that shifted in the last three to four years in terms of just recruiting and is that as a benefit for people?

 

Nick

Yeah, so totally. We were working with Lightcast that they scraped just about every job posting online in the US, but the UK, Australia, Canada, and that is about 100 million postings a year. I mean, it's pretty much every job out there is posted somewhere on the internet. What you see is the share that mentioned any kind of work from home was about 2% before the pandemic. So, it's pretty rare. It's gone up to about 12%. Now, interestingly, it took a while to rise. So the actual work from home was at its highest in April, May 2020 because of the lockdown. So, in April, May 2020, 60% of days were at home because everyone was forced to. But job postings didn't mention that. And I think because early on employers were like, we're not sure this thing's going to last. Let's not say it in the job posting when the person's in an interview or saying words, we just don't want to commit to it. By 2023, the actual job posting now mentions it. It's clearly, you know, people see this as permanent. It's a commitment. I mentioned it's about 12% of postings mention it, but we know about 40% of Americans are working from home.

So where's this gap coming from? I think the gap is a lot of jobs now take it as given. So, when Stanford hires professors, assistant professors, we were just talking about this internally, it's very normal to allow them to work from home. We just wouldn't say it. And I call it, you know, I was calling it like, what I call the electricity problem. So every job you use electricity, but I don't think it's ever mentioned any job posting or every job you're allowed to go to the toilet, but people don't mention it. So, in a weird way, it's a kind of symbol of the success that, you know, only 10% roughly mention it, the other 30 don't. And I think it's because it's just taken for given. But yeah, that's where things are. So, it has seen about a 5x increase, 6x increase in mentions in job posting, but I think many just don't mention it because it's become standard.

 

Tod

Yeah. It's just part of the lexicon now, right? It's just part of the way we work, right? There are some jobs where doing it either full-time or part-time on your own versus in the office or hybrid is, you know, it's a component of the job.

 

Nick

Yeah, it's also turned out, by the way, interesting, when you talk to lawyers, one thing for managers is to be careful what you write in your contract. Because people through pandemic never paid any attention to place of work. You kind of typically stipulate days of work and activities, but place of work turns out, some people would state it, some wouldn't. Post pandemic, it turns out that's quite a big deal. So, I'm not a lawyer, but certainly in contracts, does it stipulate the place of work? When I looked at my contracts, I never really paid much attention. I mean, I didn't pay much attention to hours because they were nominal for graduate jobs, but days certainly mattered. You would look at days you're supposed to be in.

So, Todd, I was intrigued for you and Craig, what your thoughts are on peak office. So, I've seen this term kicking around, you know, Mark Galbraith, Joel Pollack and others have talked about we've passed peak office. What do you see in the Cresa data?

You know, I think you have to look, when you look at the total all in country data, it's reasonably slow moving, right? Obviously new construction starts are way down speculative constructions. Way, way, way down. Um, there is building bespoke building for, uh, very specific end users. And there is a whole repositioning a whole rehash of what people have, what they need, where they need it in the type of space and that's what we're working on all the time.

Craig, any insights you have on it?

 

Craig

Yeah, so it's new construction is hampered by a lot of forces right now. One is demand, of course, other is debt and rising interest rates. But the truth is there really is demand for trophy class A great space that's amenity filled. Those types of properties are doing fairly well and they're holding their rents. Pretty similar to where they were pre-pandemic. It's really the buildings maybe that are high class B or 15 to 20 years old that don't have the same amenities that are struggling the most. So it depends where how you slice it. There is demand for office right now. It's just, it needs to fill the exact needs of a lot of the office users right now. So because they're also trying to attract and make people want to come to the office and have that experience.

 

Tod

We use the term flight to quality a lot and that's absolutely the case right now. Not only within a city, but across the country, right? You've had people at the camp to lifestyle cities and choosing lifestyle cities. And our business follows talent, right? And knowledge worker talent chooses where to live first and the company second, and the companies follow, right? So, a lot of our discussions with clients are around.  Where's the talent tomorrow I need? Where's the talent today I need? And where should I be? And that changes footprint. And then behind that, there's a real repositioning, right? And then you put on top of that the cost of capital and there's a real sort of washout of equity in buildings that maybe aren't the most best positioned. And that's gonna take a little bit. And then the cycle starts again.

 

Nick

Yes, I mean, it's certainly cyclical. So, Craig, out of interest, do you see net construction is positive or negative? I know building has slowed down. I'm guessing conversion and scrappage is rising. I wonder whether...

 

Craig

It is in certain cities. The problem with a lot of conversion, I think a lot of what I've heard from people as well, we need affordable housing in downtown cities. The problem with that is it is very expensive to convert office space, especially large footprint office space into housing. It's much easier to do it for other uses like hospitality and maybe some retail and that type of thing. It will be converted just because we are in a capitalist economy and society, and there's a demand for space downtown. Some of it will probably be torn down, I suppose, but I think it's a little too early to tell what types of uses will be in downtowns for those class B spaces.

 

Tod

It takes a resetting of the baseline economics of the site, right? And you see that, you can see it in San Francisco, any buildings that have traded are trading for slightly above land value. It takes a trading down to what the right price point is to then reposition. And that will work through and that's, that's not months. That's a, that's measured in years.

 

Nick

So, you mean slightly above land by the mean in San Francisco, as that was a field with grass on it, there will be trading for about the same price as the current office building is particularly.

 

Tod

Just about that really when you look at it, we see buildings going for $200 a square foot where they should be $1,200 a square foot. And that's really because like anything else, the worst time to sell something is when there's no market, right? So, buildings that are forced into a sale for whatever reason, most constituents, whether they be lenders or equity, will avoid that, right? Because you're just locking in a loss. But that's one of the problems. You're just having a illiquid market, right? And things have to they have to find their core value in the new world right now and once they are reset to that then you know new things start.

 

Nick

We'll have to touch base again in 18 to 24 months to see where things are.

 

Tod

I think it's going to be an exciting time for cities in the next five years, but it doesn't start easily. This is going to be a couple of years of the challenges we're seeing right now. But I think long term, you're going to see more vibrant cities. I keep going back to New York post 9-11, when a number of us would have written off downtown or written off New York almost altogether. And it did not take that long for it to become a vibrant city based on talent. Where talent goes, right? And that you still see that you will.

 

Craig

And I would, I would add to that. I think this has already happened in some, like Detroit's a good example of this. In the 70’s and 80’s, it was pretty vibrant downtown. And then there was flight for a variety of reasons from downtown Detroit. And there was a lot of great buildings downtown. That took 30 years, honestly, to be, to be built back and to be recovered and it has. And if you go downtown Detroit today, it is a different place than it was 10 years ago. That just took time and demand actually to...

 

Tod

And Detroit is probably the most extreme example you could pick, right? Sure. The other thing we like to talk about is some of these cities, lifestyle cities today, mid-sized cities, we would have written off years ago. We had, right? And now the Milwaukee's and the Boise's, forget about Nashville and Austin, just the high quality of life cities that talent chooses to go there and companies follow. That's, you know, that is the ingredient that will happen back in main cities again, right? Is talent goes there, people go there, housing, experience, destination, knowledge workers. Although everything you have explained is a fundamentally lower use level. That's what's different here. This isn't just a migration talent. This is, or this is not economic. It's we're using space differently, and we're going to use less. And we are. So it's going to take longer to net absorb in this cycle, because the tide's gone out a little bit.

Nick

 Fantastic. Great. We have the next five years mapped out already in front of us.

 

Tod

There's just something to talk about but look Nick great talking to you always fun to go deep on the subject I'd encourage the listeners and the watchers to click on Nick's work in the in the subtext here and look at what he's done. It's fascinating stuff Nick thanks again for joining us and we'll see everyone on the next podcast of opportunity space.