A Blog by Jonathan Low

 

Jul 22, 2021

Why the World's Financial Centers Struggle To Return To the Office

Employees remain concerned about infection from unvaccinated colleagues or from commuting. Summer school breaks are also delaying office returns given the shortage of childcare alternatives. 

But the benefits of remote or hybrid work have also caused some delay as employers dont want to alienate key talent who want more flexibility. JL 

Emily Cadman and colleagues report in CityLab:

15 months after locking down to ward off Covid-19, the globe’s key financial centers are struggling to get employees back to their offices. Workplace activity in London, New York and San Francisco is still 50% below its normal level. For workers, the main worry about returning is the risk of contracting Covid-19 when commuting. Employees enjoyed the flexibility that comes with remote work but also important are schools being open.


The journey back to your desk is shaping up to be slow and indirect.

Roughly 15 months after locking down to ward off Covid-19, several of the globe’s key financial centers are struggling to get employees back to their offices.

Workplace activity in London, New York and San Francisco is still 50% below its normal level, according to mobility data from Google, which tracks the locations of its users. Other evidence from Frankfurt, Singapore and Hong Kong reveals how virus-related restrictions have changed habits and caused new problems.

Ghost Towns

Workplace activity in some cities is still about 50% below pre-pandemic levels

Frankfurt
▼17%

Mar 2Jan 1Jun 14-100-500%

London
▼40%

Mar 2Jan 1Jun 14-100-500%

Hong Kong
▼13%

Mar 2Jan 1Jun 14-100-500%

Singapore
▼33%

Mar 2Jan 1Jun 14-100-500%

New York
▼54%

Mar 2Jan 1Jun 14-100-500%

San Francisco
▼61%

Mar 2Jan 1Jun 14-100-500%

Note: Community Mobility Reports show daily relative change using aggregated, anonymized sets of data from user location history. Data has been smoothed to weekday average. Frankfurt represented as part of the region of Hesse, being the largest city with 12% of the population.
Source: Google

With the pandemic showing signs of tailing off in parts of the world, employers such as Apple Inc. and JPMorgan Chase & Co. are preparing to get more staff back to their desks in a bid to preserve their culture or boost collaboration frayed by months of Zoom calls.

That process will be complicated, and depend largely on factors outside employers’ control: vaccination and the spread of variants are critical, but also important are the availability of transport and schools being open.

Businesses also face growing pressure from employees, many of whom have enjoyed the flexibility that comes with remote work, to change their practises permanently. Google, American Express Co. and Unilever are adopting policies that will let people spend at least part of the week out of the office even after Covid ebbs.

While the picture differs widely between cities and even companies, one thing is clear: A return to life as it was before the pandemic is still a long way off—and any renewed outbreaks could derail even the most elaborate of plans.

Frankfurt’s Zeil district is buzzing with activity as bars and cafes re-opened at the end of May—but, for now, the growing crowd consists mostly of shoppers and revelers enjoying the rising temperatures. The financial district continues to be eerily deserted, with only the occasional worker entering or leaving one of the city’s many high-rise buildings, as federal law requires non-essential office workers to continue working from home until the end of June.

That anecdotal evidence is in line with proxy indicators suggesting that business in Frankfurt is still far from normal. Weekday workplace mobility data from Google for the region is still down 17%, while passenger numbers at Frankfurt airport—one of Europe’s busiest hubs—remain less than half their pre-crisis level. Revenue at hotels and restaurants, which have been forced to close their doors to travelers, shows a similar trajectory, according to data compiled by Germany’s federal statistical office.

The major obstacle to any return to normality has been the sluggish rollout of coronavirus vaccines across the EU. The proportion of people fully vaccinated in Frankfurt was only at about 25% as of June 20. But that could increase rapidly in coming weeks: The pace has picked up since the country gave permission for primary care physicians to give jabs, and may further increase after company doctors started giving shots, too.

Vaccine Uptake

Frankfurt trails San Francisco and New York

Two doses

One dose

Unvaccinated

At least one dose

San Francisco

73%

London

55%

New York

54%

Singapore

47%

Frankfurt

38%

Hong Kong

27%

0

3

6

9M

Note: Latest data available for the period June 14–20. Vaccination rates are based on latest figures for total population. Only two–dose regimens from Frankfurt’s mobile vaccination teams are reported.

The picture of a deserted financial district could change quickly as a result. The infection rate has been dropping, and the government is unlikely to renew the requirement for workers to stay home at the end of June. What’s more, many German businesses have been lobbying the government to soften the requirements, suggesting they will be quick to call on their workers to return to the office.

Can the return-to-office push survive an encounter with a highly transmissible new coronavirus variant? The City of London is about to find out.

Britain was due to see the last restrictions on people’s mobility lifted on June 21—but the spread of the delta variant meant Prime Minister Boris Johnson was forced to postpone the grand reopening of society until July.

Deutsche Bank AG, Goldman Sachs Group Inc., and other banks in the City of London have all had to pause their plans to return staff to their desks, dealing a blow to the restaurants, pubs and retailers that depend on office workers for their trade. With the summer vacation season approaching, the Square Mile may have to wait until September before workers return in droves.

But the spread of any new variants of Covid could complicate the process. In Manchester, a city little more than 200 miles away from London, a sharp increase in cases linked to the delta variant prompted many residents to stay at home last week. Sandwich sales at Pret a Manger Ltd.’s outlets there fell by almost 10% over the week, Bloomberg’s Pret Index shows. In the City of London, sales levelled off.

For workers, the main worry about returning is the risk of contracting Covid-19 when commuting, according to a survey of 520 business leaders by the London Chamber of Commerce and Industry. Addressing those concerns will be key to whether the slow recovery London had been seeing in recent months will continue.

Prior to Johnson’s announcement, both road traffic and public transportation use had been rebounding. Traffic in the Square Mile was already busier than it was July last year, according to location data compiled by Mapbox. Weekday activity in May was stronger than in April.

Slow Hustle

Activity index shows the Square Mile is getting busier on workdays

May 2021

More activity ▲

April 2021

July 2020

Jan 2021

Less activity ▼

Mon

Tues

Wed

Thur

Fri

Sat

Sun

Source: Mapbox

On June 10, traffic at 15 key underground stations in and around the City of London and Canary Wharf hit the highest since lockdowns began last March, according to Transport for London, which runs the city’s tube network. But it has yet to get anywhere close to pre-pandemic levels.

The number of travelers peaks on a Thursday and falls off at the weekend, much as it did before the pandemic, suggesting that most of the traffic in this area continues to be made up of office workers. Retailers and pubs will be watching carefully in coming weeks to see if commuter numbers continue to increase even if a new wave of infections spreads.

In Hong Kong, most workers are already back at their desks—but whether they will be able to stay there long-term will depend on the government being able to persuade more citizens to take the vaccine.

With local daily infection numbers hovering near zero for weeks, office attendance in Hong Kong has nearly returned to pre-pandemic levels. In March, average daily passenger numbers on rail operator MTR Corp.’s major routes reached 73% of the level seen in the same month of 2019, government data show. Banks such as Goldman Sachs and HSBC Holdings Plc are already reopening their offices to all employees.

However the city is still grappling with a relatively low vaccination rate compared with other financial hubs, a major obstacle on the path to full reopening.

Commuting Return

Average daily passenger numbers on Hong Kong Island’s MTR have picked up

6M

5

4

3

2

2018

2019

2020

2021

Source:  Hong Kong Transport Department

Despite being one of the few places in the world where vaccines are available to all adults, the 2.75 million doses administered are only enough to fully vaccinate 18.3% of the population, according to Bloomberg’s Vaccine Tracker—well below Singapore at 28.3% and London at 29.1%.

Vaccine reluctance in Hong Kong reflects a mistrust of the government, as key political freedoms have been eroded following 2019’s unprecedented street protests. The unrest has prompted doubts among companies about the city’s stability as a place to do business. Together with the economic downturn, these concerns have contributed to falling office rents and rising vacancies.

Pain for Office Landlords in Hong Kong

Demand for offices continued its decline

Net rents are falling

While vacancy rates soar

150 HKD/sq ft

8%

140

6

130

4

120

2

110

0

2017

2018

2019

2020

2021

2017

2018

2019

2020

2021

Source:  Colliers International

Increasingly, the government has sought the support of businesses in its vaccination rollout, with the Hong Kong Monetary Authority urging all financial institutions to “strongly encourage” staff in client-facing roles or support functions to get inoculated.

Chief Executive Carrie Lam announced a new campaign to accelerate the city’s slow inoculation rate by September, with measures such as paid leave for vaccinated civil servants and possible additional restrictions for unvaccinated citizens.

In Singapore, working from home is once again the default arrangement—a reminder that the world’s journey back to the office may be far from direct.

Lockdown-like conditions were re-implemented in May after coronavirus cases spiked to a few dozen a day—modest numbers compared to cities like New York or London, but still a significant jump for the city-state. As a result, the number of workers in offices that month dropped 23% compared to April, according to estimates by real estate consultancy firm Knight Frank.

That’s less dramatic than the 60% slump when lockdown conditions were imposed last May. The adoption of flexible work arrangements was slowing the return to the office even before the last outbreak. At Standard Chartered Plc for instance, about 80% of Singapore employees are able to work remotely. Singapore’s largest real estate investment trust, CapitaLand Integrated Commercial Trust (CICT), recorded 51% of workers back in the office before May’s flare-up.

Slow Return to Office

CICT had more than 51% of office workers back in early May

51%

43%

35%

15%

Oct 16

Jan 15

Apr 16

May 21

Note: Based on pre-pandemic employee numbers
Source: Capitaland Integrated Commercial Trust

According to government data, the island’s vacancy rate for top-flight offices rose slightly in the first quarter—9.8% compared to 9.6% in the previous period. And the slow return to office is impacting rents. Average monthly rents for the most desirable office space fell for a fifth consecutive quarter in the first three months of the year, dropping by 1.2%, according to Savills Plc.

Pain for Office Landlords in Singapore

The slow return to office is impacting office rents

An index of rents is falling

201620182020165170175180185

While vacancies spike

201620182020810121416%

Note: Quarterly rental index of Grade A offices, 100 = Q1 2003
Sources: Urban Redevelopment Authority, Savills

Even as Covid-related restrictions start to ease, companies operating out of small offices will face obstacles in enforcing ongoing strict social distancing measures, and most firms are grappling with employees’ desire to work remotely, said Christine Li, head of research for Asia Pacific at Knight Frank in Singapore.

“Most companies want to bring their staff back to the office on a regular basis, but the world has evolved post-Covid,” she said. “Offices are becoming an intentional destination just like shopping malls, where people don’t go back all the time to get individual tasks done.”

Li expects the recovery of the office sector to be delayed, with firms adopting a wait-and-see approach to lease renewals and relocations. “The conservative approach is likely to be extended for another quarter or two until dust settles,” she said.

New York’s office districts are slowly waking up from their hibernation as Wall Street bosses and Mayor Bill de Blasio call employees back to their desks, 15 months after the city was devastated by one of the earliest U.S. Covid spikes.

Most restrictions on business capacity and social distancing were lifted in May, paving the way for workers to come back. JPMorgan, the country’s largest bank, is mandating a full workforce return, at least on rotations, by early July. Goldman Sachs took one of the more ambitious approaches, requiring almost all employees at its New York office to report to their desks by June 14.

The city’s public-transit is rejuvenating, even as it remains well below historical levels. Average monthly ridership on the subway in May was about 58% below the pre-pandemic baseline, compared to 63% in April, according to data compiled by the Metropolitan Transportation Authority. Travelers on the Metro North train line and on the city’s bridges and tunnels have also improved, and all three are at their busiest since March 2020.

Station-specific data shows that some subway stops near business hubs are still seeing a fraction of their pre-Covid usage as office workers make a relatively slow return. Grand Central, Times Square, and the Lexington Avenue stop on 53rd St. all saw less than a third of their earlier volume as of May.

Steady Return to the Office

Less than 40% of people are using the trains compared to pre-pandemic levels

Herald Square, 34th St

Grand Central

40%

40%

30

30

20

20

10

10

0

0

Jan

May

Jan

May

Times Square

Lexington Ave, 53rd St

40%

40%

30

30

20

20

10

10

0

0

Jan

May

Jan

May

Note: Percentage values are derived from comparing the median weekday total of people exiting a station (not including weekends), on a given week for 2019 and 2021
Source: Metropolitan Transit Authority

In residential neighborhoods such as the West Village and Upper East Side, restaurants and bars are filling up as social life revives. Yet in office-centric areas such as midtown Manhattan, the streets are more quiet. Only 22% of New York-area office workers were back at their desks as of June 16, according to building data from security company Kastle Systems.

Vacancies in the city’s commercial real estate market suggest a rebound will be slow-going. The amount of office supply in Manhattan reached the highest level in at least three decades in the first quarter. Sublease space available reached 22 million square feet (2 million square meters), 62% higher than before the -pandemic and more than the levels seen after the great financial crisis and 9/11 terrorist attacks, according to Savills.

Loads of Space

Manhattan’s available office-space square footage is the highest since 2003

25M

20

15

10

5

0

2000

2005

2010

2015

2020

Source: Savills.

Traffic is starting to thicken on San Francisco streets and sidewalks. More than 80% of the city’s eligible population has received at least one dose of the vaccine, and California lifted most business restrictions on June 15. But behind office towers’ glass windows, hallways are empty and desks are cleared out, some potentially permanently. Some of the technology companies that drive the city’s economy, including Salesforce.com Inc., Airbnb Inc. and Twitter Inc., have looked to sublease space as the industry embraces flexible work arrangements for the long term.

More than 9 million square feet of offices are up for sublease in the first quarter, the highest in data going back to 2005, according to brokerage Savills. The rise of remote work could allow companies to permanently reduce their footprint by a quarter to a third, said Mark Cote, the managing partner and co-founder of T3 Advisors, which develops real estate strategies for tech firms.

Subleases Surge

More than 9 million square feet of office space in San Francisco is up for sublease

10M

8

6

4

2

0

2005

2010

2015

2020

Source: Savills

As of June 16, only about 19% of office workers in the San Francisco metro area had returned, according to Kastle Systems. That’s the lowest share among 10 U.S. cities the company tracks.

Office Workers Slowly Return

About 19% of office workers in the San Francisco metro area have returned

20%

16

12

8

4

April

2020

Jan

2021

Source: Kastle Systems

It may not be until September before the region gets a better feel for the new normal workweek. That’s the back-to-office target for companies including Uber Technologies Inc., Apple and Google, which all have said the returns will come with flexibility. The Bay Area Rapid Transit agency is counting on its commuter base returning in greater force then, too, and plans to ramp up service by Aug. 30 to meet it.

Even some companies that have earlier return dates in mind anticipate needing months to establish set schedules. Atlassian Corp., an Australian software company that hired more than a third of its current workforce during the pandemic, is opening its offices in Silicon Valley at the end of June, and its San Francisco offices four to five weeks later. Employees are expected to come in at least once a quarter, but the company hasn’t set any other in-office expectations yet.

“Folks haven’t fully reemerged yet to define their preferences and commuting behaviors and/or office needs,” said Scott Hazard, who is running the company’s move to distributed work. He sees work behavior still unfolding, “where people will just see it more as a drop-in, or a multi-location strategy, we think, than a single office destination.”

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