This article was originally published in September 2020.
Around 15 million people work in around 410 million m² of office space in Germany. Although many people used to work occasionally from home prior to 2020, the home office only became the available option for many workers in the course of the coronavirus pandemic. People’s experience during this lockdown period has certainly been mixed; daily commutes have been shortened, coordination work has had to be conducted electronically in a new system, work-life balance has been renegotiated hour by hour, and not just based on landmark decisions concerning family and career planning.
Above all, however, many companies and their managers have had to set aside their fears of addressing the issue of working from home and have had to embark on a learning curve that was previously often avoided, be due to caution or prejudice; what’s more, employees have not had to put their head on the line to voice their wish to work from home. Experience is like the mythical genie in the bottle; once released, you cannot undo the experience. The genie stays outside the bottle for good. This is where the analogy between experience and the genie in the bottle ends because it is primarily up to us to make what we can of our new experience, i.e. how we continue up the learning curve. So, the first message of this essay is that everything we have learned about working from home over the past few months represents just the first steps on a longer journey.
What could the next steps look like? In a recent study, analysts conducted by Catella (2020) found that two in every three respondents prefer one to three flexible days, and 20% of those surveyed even prefer complete freedom in terms of how they structure their working hours and place of work. This additional flexibility could enable companies to economise on fixed office space and this, in turn, could significantly reduce the demand for office space. If, for example, every employee were actually to work from home for two days, and if only half of this space thus temporarily freed up were then to be planned more flexibly in existing office premises, e.g. in the form of shared office workplaces or by leasing more co-working space, this could reduce demand for office space by one-fifth in the long term – 80 million m² rental space or seven times the office supply in Frankfurt (all other things being equal).
However, the point of this paper is not to estimate how much the demand for office space might (or might not) dwindle in the next few years, but rather to argue that there should be a wide range of different answers to the question of an appropriate home office ratio in a company and that government intervention can do more harm than good here. At the end of the day, it all depends on individual learning steps and the specific needs of teams and companies.
Specific requirements
Ultimately, office real estate is an elementary production factor for a company. The actual decision for or against specific permanent premises should be based on whether additional profit expected from this decision is higher or lower than any other alternative. This may sound trivial, but unfortunately this statement masks a whole series of management decisions that are currently being given relatively little air time. Is this profit just an additional short-term, e.g. profit achieved within a year, or is a discounted figure maximised from many additional sources of profit? Does the effect result from sales growth or cost reductions or a mixture of both, and could these effects possibly also be realised by other measures? This question is important because cost reductions can often be estimated more reliably than changes in revenue. Does the result depend on political constraints or possibly on the absence of those constraints?
More specifically: a company’s costs could of course fall if it had to rent less office space and have its employees make their home available to the company, i.e. turning their home into an operating resource. Applying the same logic, the company would also save money if we brought our own personal computers or printers to work. However, this would only be the case if lawmakers tolerated this outsourcing arrangement on a permanent basis. According to the German Workplace Ordinance (Arbeitsstättenverordnung) which governs teleworking jobs regulated under contract, teleworking jobs currently have to comply with stricter safety and workplace requirements than remote workplaces. This would invite persistent regulatory arbitrage and is likely to lead to regulatory changes in the medium term. In this case, rules on occupational safety or the tax treatment of these resources could be tightened. Understandably, more has been tolerated during the pandemic than could be expected in the long term. Times of crisis are not times for bean counters.
Costs are only likely to fall if they are not countered by additional transaction costs in the form of further agreements, increased controls or higher expenditure resulting from correcting errors. It is likely that this period of great uncertainty we are experiencing during the lockdown will not adequately substitute the behaviour of employees and managers when things hopefully return to normal in the years ahead. Employees could better exploit greater latitude in periods of relaxed working practices than during periods of great job insecurity, while managers could feel more uncomfortable with the possibly perceived loss of power and control than during the exceptional phase. The success of working from home then not only depends on technical parameters such as space and IT availability, but probably even more so on what kind of mindsets and specific activities are present and need to be performed in a team.
These soft factors are likely to be particularly important where office workers not only carry out firmly defined packages of work, but where the quality of the outcomes simply cannot be fully determined in advance, where incidental events in the teamwork produce an unexpected outcome, and where the interaction of people allows creative solutions to be found or leads to a new problem being identified.
Sometimes random spillover effects occur in daily interaction between teams: you may be chatting to the financial controller at lunch and suddenly discover a solution to a marketing question, perhaps because the controller just happened to have built a website for the local sports club and has had to solve a similar problem. These random encounters are also important because they can reinforce team cohesion. Managing at a distance can then be more challenging than managing in person because inconsistencies become less clear, friction is suppressed; “challenging” is of course management-speak for the fact that employees may feel misunderstood, that motivation suffers or that much simply remains unsaid. Where creative work is crucial, very different people often have to be brought together and this is very management-intensive. Inadequate leadership undermines productivity leading to an increase in transaction costs. For this reason it is highly likely that the home-working potential of more than 50% for Germany identified by Alipour et al (2020) is no more than an estimate of a technical upper limit and is by no means a plausible estimate of what can be expected.
Conversely, however, this by no means implies that the cost-benefit considerations indicated always have to point towards a traditional office set-up. Valuable chance encounters are also possible outside the office, managers can also make productive use of the lower levels of control, and perceived responsibility and freedom may well inspire employees. As learning curve effects depend on cumulative production activity, it is even likely that the benefits of (more) working from home may only come to light gradually.
However, the crucial point remains: the best possible solution for a real team hinges strongly on the personalities involved, their experience, their extent to which they are tech-savvy, their social interaction, on the actual projects, on practised corporate values and probably also on the market phase. These are far too many parameters for off-the-peg solutions to be applicable to all companies/departments/people.
The right to work from home would not necessarily to this complexity justice because employees could still make decisions that would affect the team independently of the mechanisms outlined above. If these were to have a negative impact on efficiency, not only would the employee be putting his/her own job in jeopardy, but also those of team members indirectly affected.
One thing that is certain is that more employees and more line managers are now considering the idea of working from home as a perfectly normal form of work and are building it into their strategy as a matter of course rather than just as a special enticement for a few exceptional cases. While this will undoubtedly have a quantitative impact on the demand for conventional office space, two qualitative aspects will probably be more decisive: firstly, the type of office space that will be in particularly high demand in the future, and secondly, how we organise office work in the future to make use of the increased scope for potential. You might have guessed it: there can be no hard and fast answers to these two qualitative aspects either. Management responses have to be tailored to the needs of the team. In a nutshell, the more options there are, the greater the potential for cost savings – ideally; however, this also puts greater strain on management. A failure to correctly gauge team mindsets and project requirements may lead to increased costs.
For those involved in the real-estate business, there are four key messages (among others). Firstly, the value of office space flexibility is likely to increase. This is definitely good news for co-working formats. Secondly, if there is uncertainty about off-the-peg solutions at user level, bespoke solution providers who understand the business models of future users will reap benefits. Thirdly, as it is currently still difficult to assess the implications for spatial development in quantitative terms, investors should probably adjust their risk premium for office property upwards compared with their benchmark (e.g. residential). Fourthly, it is worth taking a closer look at the business models and working models of potential users in the post-coronavirus period. After all, real-estate expertise is also user expertise.
Literature:
Alipour, Jean-Victor / Falck, Oliver / Schüller, Simone, 2020, Germany’s Capacities to Work from Home, Institute of Labor Economics, IZA Discussion Paper Series, No. 13152, Bonn.
Catella (2020). Market Tracker Q3 2020. https://www.catella.com/globalassets/global/mix-germany-corporate-finance/catella_mt_07_homeoffice_d.pdf. Last accessed on 17/08/2020.
