Q: You are an expert on workplace and labor force dynamics. The pandemic has had a tremendous and historic impact. How will these affect physical activities of businesses in retail and hospitality, or in-person financial services like bank branches?
Nicholas: It’s obvious there’s been a massive drop of retail spending in city centers and that’s driven mostly by work from home. For New York, you can calculate that, of folks that can work from home — which is probably 50% to 60% of the labor force — those people on average are going to work from home two and a half days a week.
We survey them every month and it’s what they tell us. If you go into the office in the city one day a week, you shop less in town. If you prorate that, you can pretty rapidly get to enormous drops in expenditure in city centers. In New York, I think the number was $6,000 less per office worker per year. That’s probably millions of people and billions or tens of billions in less spending which may be gone for the for seeable future. It’s a big drop.
25% is the number of workdays expected to be at home for white collar workforces in large US cities.
Q: Is that distribution normal for other cities or is New York skewed towards work from home?
Nicholas: We look at the top 10 cities, so 25% is the number of workdays expected to be at home for white collar workforces in large US cities. New York and SF are slightly further out but not much. Most big US cities have most of the downtowns which are full of people in offices, even in Dallas. When you go to medium and smaller, it’s probably slightly lesser effect but there is still an impact. I went to Manhattan, Kansas. I remember that was a two-street downtown next to Kansas State University. Even there, if you’re now working from home, you probably don’t eat in the city center anymore. So overall, I think the work from home effect is quite generalizable.
Q: Is this related to the “Donut Effect”?
Nicholas: It is slightly different. The Donut Effect is about where people live, not where they shop. This effect is the hollowing out of cities and the growth of nearby suburbs. The Donut Effect is concentrated on big cities. This will mean retail expands outwards to where people are. But it’s very clear who the losers are — commercial property owners in big cities. The winners are, I guess, people that own suburban malls or retail or restaurant spaces — places where people that work from home will go.
Q: Where will the percentage of work from home settle out?
Nicholas: My estimation is it will settle out about 25% of working days in the US. We’re currently at about 35% based on data I see. I think it will fall to 25% by Christmas or Spring of 2023 and stay at that level. But from that point I believe it will gradually grow as remote work technology improves. The market size for remote technology has grown roughly by 5X due to the pandemic. The work-from-home rate before the pandemic was 5%. It is now much more lucrative to build products for this market because the market is bigger, and you will see research and development dollars flow into it. We actually are seeing early signs of this. We have a paper looking at the frequency of newly issued patents focused on remote working from the US Patent and Trademark Office and those filings are significantly up.
Q: What are other knock-on effects for front line, in-person industries like retail and hospitality and restaurants?
Nicholas: We discussed the enormous locational shift out of city centers into the suburbs. The second question is how much there’s an additional shift that hits everywhere from offline to online. I don’t collect data on that, but I could easily see that work from home is an accelerant to shifting online because now you’re sitting at home. Often you haven’t got dressed to leave the house. For a lot of front-line workers, they may just switch to jobs closer to where they live. If you work at McDonald’s in San Francisco, they may stop coming in from Stockton or other remote places and instead just work at the nearest McDonald’s.
One big concern might be public transit. Far fewer people are using public transit so the value of having a store or restaurant near a transit stop will be lower. There are real risks to public transportation because they have high fixed costs. Reduced use and revenues mean they need a bigger subsidy. And if they don’t get it, they might have to cut trips or even entire lines. City budgets in general are under stress and they will likely have to cut public services.
Q: What does the future hold for working in offices?
Nicholas: Right now uncertainty is very high. Companies are renewing leases at seven-year versus nine-year averages pre-pandemic. They are signing more expensive, shorter leases. They’re letting some leases expire and going into WeWork offices. Basically, firms are paying for flexibility because they don’t know what’s going to happen and I’m advising them to do that. I think there will ultimately be a reduction in office space rented. I also anticipate a bit of pickup in outsourcing and offshoring. A lot of firms have said “Things work really well remote — better than we thought. Why do our team need to be in the US or why do these people need to be in the company?” That’s going to see a huge surge and will likely mean even fewer people working in offices.
