Is telework killing a billion-dollar office economy?

Tram Ho

For the past decade, Carlos Silva has been gluing, building and repairing shoelaces and boots at Stern Shoe Repair, a high-traffic shop just outside the Metro entrance at Union Station in Washington DC. Normally, he would go to work at 7am and leave at 8pm. But since the office work and the train ride almost stopped working, he closed the store at 4pm. “Nobody’s going around. The whole station is dead. Now it’s just a part-time job,” said Silva .

Economists have focused heavily on the pandemic devastation of small and medium businesses, traditional stores, bars, restaurants and large chain stores. But they barely notice a bigger and more consequential threat, an economy worth trillions of dollars of GDP a year and revolve around a single economic agent – office workers. intellectuality.

As companies in cities across the United States were forced to delay and even abandon plans to reopen offices, they turned the cramped city’s business districts into “ghost” commercial towns. with vacant skyscrapers and high-end complexes. As a result, the paralysis of the business ecosystem is rarely mentioned – the intellectual workers – which accounted for 100 million pre-pandemic workers.

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These workers shop at small businesses like shoe repair shops, dry cleaners, gyms, food carts, florists and pharmacies. But they’re also one of the most important customers and a source of revenue for a bunch of larger, less obvious businesses – food delivery companies like Grubhub and Uber Eats, and printing supplies companies. press like Xerox.

Between Covid-19, the Brooks Brothers and J.Crew office goods outlets filed for bankruptcy protection, while Brooks Brothers went up for sale last month. And in its quarterly report at the end of July, Starbucks posted a loss of about $ 2 billion a year because the office buildings were deserted. Starting the day at home work, teleworkers no longer have to line up for a morning coffee.

Meanwhile, in the air, business trips used to account for 60% to 70% of the total revenue of the airlines. Although entertainment venues have also been closed, the “zooming” of business meetings is the biggest blow, causing flights to plummet in at least the next few years.

And the switch to remote work shows no signs of stopping anytime soon. In recent months, many companies, including JPMorgan Chase, Ford Motor, Twitter and REI, have announced some form of permanent or permanent home work in the future. Pinterest caught the attention when it announced it would pay a contract penalty of $ 89.5 million to cancel the lease of a flashy 45,000 square meter new office building in San Francisco, citing the change to the form of work from far away forever.

The pandemic has shown these companies that their employees can get their work done at home (maybe even more efficiently), allowing them to dramatically shrink the actual corporate office space. America. It will help these companies save on employee rental and travel costs, but what costs are there for other sectors of the economy?

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Intellectual workers and coffee makers have been sticking together since caffeinated drinks entered Europe in the early 17th century. Within a few decades, about 300 cafes have sprung up in London to serve them. nearby merchants, brokers and other traders. It is the same in Austria, France, Germany, the Netherlands and Italy. The fledgling office economy was born.

And the office workers are also the main center of profit for the tourism industry, they are the people who return home, profitably for airlines and hotels.

But now MIT economist David Autor said in an article last month: the office economy is under threat. The pandemic has caused a large portion of the office workforce to switch to remote work, which is almost certain. And tens of thousands of office workers like “cooking, transportation, clothing, entertainment and apartments for those not in their own homes” will lose their jobs.

The effects on the office economy are obvious. The Wall Street Journal reported that business travel in July fell 97% from a year earlier, and it is estimated that about $ 2 trillion will be lost. Last week, American Airlines said it would suspend service to 15 cities by October, reduce its capacity to 55%, and if it does not receive additional bailout from the government, it will take a break and laid off about 19,000 workers, or about one third of the employees. Delta said it will leave 1,941 pilots off if they can’t make more revenue. In August, Virgin Atlantic completely filed for bankruptcy. In the long run, a sharp increase in Zoom meetings means a decline in corporate passengers. And this can be a permanent change.

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The pain for the tourism industry is great. Hotels that often cater to business travelers are in crisis, some are ready to go bankrupt. As of July, 23.4% of hotel mortgage loans that are at least 30 days past due, amounting to $ 20.6 billion. Before the pandemic, overdue loans only reached $ 1.15 billion and $ 13.5 billion at the height of the 2008 recession. Last month, in a letter to the National Assembly, hundreds of clients The hotel, led by the American Hotel and Hostel Association, requested a waiver of the debt. In early August, Marriott reported its worst ever loss in the second quarter, and MGM Resorts on Friday laid off 18,000 workers, a quarter of its pre-pandemic workforce.

Some of the other victims of the remote revolution that we pay little attention to are companies like Xerox – sales fell 34.6% last quarter as many offices closed and did not purchase equipment as planned. The shutdown also dropped the quarterly sales of food company Aramark by 45%. At 3M, too, the company whose revenue is dependent on the office economy, sales fell 13%. One of the reasons was the impact of airlines, which cut off 3M’s core business – tapes and adhesives. Demand for Scotch tape and Post-it note paper dropped 25%, perhaps among the office’s most iconic items.

The change in office ecosystems is upsetting the status quo in some of the most expensive cities, known for their prestigious and potential intellectual jobs. One obvious example is the real estate market. Not required to go to the office, many people return home. Goldman Sachs says a lot of people are leaving New York in search of much cheaper and much more spacious properties in Carolinas, Georgia and Florida. In Manhattan, the number of vacant homes reached 13,000 in July and the average rent fell 6.1% – the biggest drop in nine years. Tech employees are also slowly moving away from San Francisco, where one- and two-bedroom apartment rents are down 11 percent year-on-year, according to Zumper, a condominium website.

This can also be seen in smaller cities, especially in restaurants that specialize in lunches and cocktails for large offices. Dan Georges, owner of Lexi’s on Third said he lost about half of the business to Zoom. Before Covid-19, Lexi’s was very active with its business in Chase Tower, the 25-story office building. But since March, the building has been completely empty, and now the company’s business depends on hard workers working on nearby sites and longtime loyal customers from the regions. suburban. He knew that some or more of the familiar intellectual clients would not return once the pandemic was over, but hoped Lexi’s would survive on its quality and price.

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This is the perspective of central regions across the country. Goldman Sachs says the number of on-site diners nationwide fell 54% on August 16 from the previous week. In New York, more than 1,200 restaurants are permanently closed, and analysts estimate that a third of the city’s small businesses as a whole may have to close.

The problem is so big that it makes the economies of the cities difficult. The pandemic will bring “a decline in the economic center position, and even the cultural vitality of cities” . According to a survey by the National League of Cities, 90% of cities expect revenue to drop 13% on average next year – mainly income taxes and sales, revenues related to intellectual employees. This is the highest decline in the survey since the financial crisis. Houston, for example, reduced sales tax by 13% in May, 17% in April and 10% in March. This is a natural disaster affecting 50 states where buildings have been vacant.

However, the collapse of the office economy wasn’t so bleak. Cities’ resilience is the “pillar” of economic history. Wars, economic recessions and catastrophic natural disasters have come and gone, but very few major cities have completely disappeared or even been permanently closed. By contrast, most have revived to the same economic and demographic shape as before the crises.

Of course, 15 years is a long recovery, an extended period that will have devastating and irreversible effects on a generation of entrepreneurs and workers. Regardless of how long recovery times take, airlines and hotels will have to shrink, die or recreate. And, in an imperative profound transformation, cities will also have to reshape themselves, potentially seriously affecting national GDP for many years.

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Source : Genk