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The Most Radical Change To Office Life Since Computers
Nicholas Bloom boosts the pros of hybrid, but skirts the biggest con: the cratering of cities.
Nicholas Bloom is a Stanford economist who has been central to understanding of the work-from-home ‘movement’. He and a colleague, Arjun Ramani, coined the term ‘donut effect’ to describe the out-migration of knowledge workers from major US cities to the far suburbs and exurbs. I’ve cited his work a great deal in recent years.
He’s written an essay for The Economist that is an attempt to debunk the retro thinking of many corporate executives, who are actively resisting the shift to hybrid working.
But, as a scientist, he tends to write in an analytic fashion, and kind of buries the lede. Here’s my recasting of his argument:
He ends the essay with the biggest claim, which should come first, to my way of thought:
This shift to hybrid working has been perhaps the most radical change to office life since the introduction of the computer.
And what is that radical change in office life? Basically, spending less time in the office.
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I’ve maintained — in the years since the pandemic started — that ‘minimal viable office’ will be the likely outcome of this transition.
Ramani and Bloom summarized the donut effect — which goes totally unmentioned in this more recent piece — in this way, back in January 2021:
- Rents in high-density areas and central business districts of America’s largest cities have fallen more than 10 percent since the start of the pandemic.
- Though housing demand within cities is shifting from dense urban centers to more spacious suburbs, there has yet to be a substantial move from more expensive to less expensive cities.
- Working from home has caused commercial office occupancy rates to plummet and commercial property prices to fall in crowded zip codes.
- Falling property values in cities are likely driven by richer, more skilled residents leaving high-value properties. That will cause a drop in property taxes and strain city budgets.
In this way, the researchers are considering the long-term impacts on the economy of cities from the shift to WFH. Jane Margolies wrote a piece about colleges getting incredible real estate deals on commercial properties left behind by downsizing corporations:
Dozens of institutions of higher education across the United States have bought office buildings since 2018, including 49 four-year private schools and 16 four-year public institutions, according to data from JLL, a real estate services company. Some of the country’s best-known schools have made purchases this year, including the University of California, Los Angeles, which bought an Art Deco landmark in downtown Los Angeles.
For schools seeking to expand, or just beef up their real estate portfolios, the purchases can be a bonanza: With the office market in a slump, they have bought buildings at bargain prices. Renovations are usually needed, but a makeover is typically not as expensive or as time-consuming as building from scratch.
Three years after the start of the coronavirus pandemic, the nationwide office availability rate is more than 24 percent, according to data from the real estate services company Savills, a jump from 17 percent before the pandemic as property owners struggle with many companies’ reduced demand for leased square footage. The value of some office buildings has dropped so much that some landlords are simply letting banks that hold the mortgages take them over.
It may be good for these schools to harvest the windfall of all this devalued real estate, but the real estate collapse — as hybrid work has become increasingly the norm—will likely turn out to be the biggest impact of the working-from-home movement, and not the way that ‘office life’ is changed.
Bloom takes an interesting tack on why businesses are giving in to hybrid:
Before the pandemic about 5% of full paid days were worked from home across Europe and America. Working from home was something professionals would do occasionally, perhaps to look after a sick child or let in the plumber. Now about 25% of the workforce is on a hybrid schedule, working from home typically one or two days a week. Another 8% are working a fully remote schedule. Overall, about 20% of all days are now worked from home. Looking ahead, two powerful economic forces will drive wfh up, perhaps to 30% of days worked a decade from now.
The first force he names is internet-based technologies that make it possible to remain connected to coworkers and company data, from home (or anywhere, really).
The second force is the adoption of a distributed work model among younger companies:
The second force supporting remote working is business “cohort effects”. Data show that younger startups tend to be more remote-focused. These firms have been born in an era when having an office is optional and meeting customers and business partners online is standard. Many see forgoing offices and using more remote workers as a key cost-saving strategy. As a result, employees at today’s new firms work almost twice as many days from home as those at firms founded 30 years ago.
Society should embrace the Nike swoosh of wfh. Employees gain. They put a value on hybrid working that is equivalent to an 8% pay increase. Indeed, recruiters I talk to argue that the “big two” employment perks—pensions and health care—have become the “big three” with the addition of remote working.
Firms gain, too. Studies find that hybrid working can reduce employee turnover by 30-50%, as well as saving office costs and allowing companies to better tap global markets for talent. Indeed, American firms reported record profits in 2022 and the American economy has seen annual labour productivity growth accelerate from 1.2% in the five years before the pandemic to 1.5% since. There are many factors at play here, of course, but the surge in remote working is one potential contributor to this productivity renaissance.
He nods at the blowback on WFH by many corporate leaders of older companies, but mentions research indicates that hybrid — a few days in the office and the rest at home without commuting — leads to higher productivity, no matter what aging CEOs preach.
But then he tries to take the ecological and sociological highground for WFH:
Furthermore, even if fully remote working reduces individual productivity, by releasing billions of dollars of office and transportation capital for other parts of the economy to use, it stokes a rise in aggregate productivity. Productivity is about outputs relative to inputs, and although fully remote workers may produce less per hour they use a lot less capital, so their impact on aggregate productivity is likely to be positive.
With less travelling to work, the environment also benefits. wfh has reduced global commuting by a staggering 50bn miles a year from the pre-pandemic level. Finally, society gains by allowing parents to spend more time at home, easing the burdens of child care, and to be more involved in raising the next generation.
All of that being true, he doesn’t reckon with the huge civic problems — as all the office buildings are hollowed out, the superstar cities tax bases are being diminished, fewer riders on transportation systems lead to funding problems, and all the pharmacies, delis, and retail stores are closing because of decreased foot traffic — huge issues that are being engendered by WFH. A few colleges swooping in won’t be enough to counter that.
Yes, I am a strong advocate for hybrid, and like Bloom I feel certain that it’s here to stay. But we need to always couch WFH as also including a corresponding economic disruption in the use of our major cities, and that will have to be dealt with even as we are figuring out how to make hybrid work better.