Underwriting as Industries Evolve

As employers assess their future needs, we can expect many changes to the traditional office environment, including the use of hoteling, where shared workstations are scheduled for short-term use. This may lead to office downsizing, as the need for square footage can be expected to drop significantly. Several recent articles provide real-world examples of this trend, which is expected to rise:

In April 2021, the New York Times reported that many employers gave up office space and permitted more remote options.¹ For example, JP Morgan Chase, NYC's largest private employer, expects to require only 60 seats for every 100 workers.¹ Cushman Wakefield, a major commercial real estate firm, saw office vacancies in 2020 rise to 16.4% from 10.6% in May 2019.² As a result of this decreased demand for office space, we anticipate that segment of the commercial real estate industry may be adversely impacted, in addition to the cities that rely on downtown workers for taxation and business activity. While most property owners survive on existing lease agreements, the actual impact is expected to surface as renewals come due.

Estimates indicate that 17.3% of office space in Manhattan is currently available for lease, and prices have been seen dropping from $82 to $74 per square foot.¹ The most impacted properties are those along the coasts, including New York, San Francisco, and Washington, D.C. Less foot traffic in impacted areas will also affect retail stores, restaurants, and other surrounding businesses such as apparel stores, dry cleaners, and grooming salons.

Target announced plans to give up one-third of its office space in Minneapolis' City Center, where the retail giant has had a significant presence since the 1980s.³ This is expected to negatively impact downtown in many ways, including many of the same areas noted above and real estate values, mass transit patterns, and local restaurants and retailers.

Many cities expect to revise their transit systems to align with future needs due to the reduced corporate presence in urban versus the patterns established nearly 100 years ago – a change we can expect to see in many rust belt cities.

A recent Hour Detroit article cited additional changes impacting mass transit, such as moves away from urban cores, growing suburban communities, and more people working from home. Since March 2020, most transit systems in major cities have stopped their regular schedules. Those that operated at all were on a far more limited schedule and stopped collecting fares until recently. While initial changes were related to social distancing and frequent disinfecting, the deviations and unplanned costs created financial challenges for the transit systems.⁴ The industry has a unique opportunity to transform the entire concept of mass transit in urban and suburban areas.

Real estate is not the only industry seeing a long-term impact. A recent Washington Post article revealed findings from multiple sources that anticipate millions of jobs may not return even after the pandemic, with several jobs expected to be replaced by automation and artificial intelligence. ⁶

The remaining jobs would require far less travel and allow more flexibility to work remotely. McKinsey Global Institute suggests 20% of business travel will not return and, likewise, 20% of workers will not return to the office.⁶ The business travel and supporting industries will be affected, including transportation, hotels, ground transportation, and restaurants – which further bolsters concerns for the future of the commercial real estate industry.

Furthermore, various office support and manufacturing jobs are expected to be permanently automated.  The pandemic accelerated the pivot to automation and digital platforms as retail sales transitioned to online, decreasing brick and mortar retail opportunities.

In October 2020, the World Economic Forum issued The Future of Jobs Report 2020 that revealed the extent of expected automation and technology adoption to come, including robotics and artificial intelligence.⁷

A few highlights include:

• 43% of businesses surveyed expect to reduce workforces due to technological integration;
• 41% anticipate using contractors for specialized tasks;
• 34% plan to expand their workforce due to technical changes;
• The number of jobs destroyed will be surpassed by the number of “jobs of the future” created;
• By 2025, it is expected that redundant roles will decline from 15.4% of the workforce to 9%, while new professions will expand from 7.8% to 13.5%;
• By 2025, 85 million jobs are expected to be displaced as roles shift between humans and machines;
• Skills gaps continue to be high, as required skills across jobs will change in the next five years, such as those requiring critical thinking, analysis, and problem-solving;
• The future of work has already arrived for many online white-collar workforces as the pandemic pushed digitalized work processes.

The pandemic illuminated the need to be nimble, requiring retraining for roles that evolved. While training has increased, the window of opportunity to reskill and upskill workers has become shorter in the newly constrained labor market. Responsibilities have changed, and the core capabilities of workers will need to change as well. Core skills for roles expected to outlast the pandemic may vary by 40% in the next five years, and 50% of employees will require reskilling.⁷