Antonin Bergeaud, Jean Benoit Eymeoud, Thomas Garcia, Dorian Henricot 18 January 2022
As employers and employees established ways of working remotely to limit physical interaction during outbreaks of Covid-19, teleworking became increasingly routine. This column examines how corporate real-estate market participants adjusted to the growth of teleworking in France, and finds that it has already made a noticeable difference in office markets. In départements more exposed to telework, the pandemic prompted higher vacancy rates, less construction, and lower prices. Forward-looking indicators suggest that market participants believe the shift to teleworking will endure.
One of the primary hysteresis of the Covid-19 pandemic on the organisation of work is probably the dramatic take-off of telework. Forced by circumstances, employers and employees had to implement new ways of working remotely to limit physical interactions during the acute stages of the outbreak. This experience prompted companies to invest more in computer equipment and to adapt their management practices. Teleworking has thus already become a standard practice for many workers and is likely to endure (Barrero et al. 2021).
The polarisation of economic activity has led to a significant increase in real estate prices in dynamic areas. Office real estate is no exception, and the cost of corporate real estate is increasingly weighing on firms’ bottom lines (Bergeaud and Ray 2020). Companies taking advantage of teleworking to reduce office space demand could induce a structural downturn in the corporate real estate market. In the US, Bloom and Ramani (2021) show that the pandemic and the rise of telework is already having a substantial impact on the spatial dynamics of city real estate, producing a ‘doughnut effect’. In a recent study (Bergeaud et al. 2021), we look at the first signs of such an adjustment in France.
Local heterogeneity of the propensity to telework
We first define an index that measures exposure to the deployment of telework at the county (département) level. The index is the product of two components. First, we use the indicator constructed by Dingel and Neiman (2020) at the occupation level and apply it to the local composition of labour in France. We interpret it as a maximum potential for teleworking. However, this upper bound is unlikely to be reached in practice (Bartik et al. 2020). Also, we introduce frictions (quality of the internet infrastructure, average commuting time, number of families with children) that prevent the full use of the telework potential. We extract a principal component from these frictions and combine it with the maximum potential to construct a single index that measures the actual propensity of teleworking by county.
This indicator is presented in Figure 1. While it naturally shows some strong correlation with population density, we found that it remains positively correlated with actual teleworking intensity after being residualised. The bottom map plots this residualised geographic distribution.
Note: The top map shows the telework index by county. The bottom map shows the telework index purged of density effects. For both maps, counties with the darkest index have the highest telework capacity.
Adjustments in the corporate real estate market
We analyse the differential evolution of corporate real estate in counties with different propensities to telework, and show that stronger corporate real estate market adjustments are occurring in areas with higher propensities to telework.
On the quantity side, the top panel of Figure 2 shows the evolution of actual office space built since 2018 (dark blue line) and its trend before Covid-19, extrapolated (light blue line). The bottom panel presents the county-level loss as a function of the telework index. While the whole country experienced an important slowdown in terms of new construction, losses are unevenly distributed over the territory and positively correlated with the telework indicator. Importantly, these effects hold controlling for economic activity, measured as local unemployment variations.
a) Dynamics of office space construction
b) Loss in office building and telewwork index
Note: This figure shows (a) the time series of losses in office-space building (seasonally adjusted and relative to trends detailed in the text) between February 2018 and March 2021, and (b) the correlation between the loss of office-space construction after the outbreak of the pandemic and the telework index at the county level.
To look at price reactions, we use building-level information from regulatory reports of French real estate investment funds (REIFs). REIFs report quarterly valuations of their assets at the building level. We estimate the marginal effect of a one percentage point change in the telework indicator on the probability of a downward revision of building prices in the office segment compared to other segments every quarter. These effects are plotted in Figure 3 along with the 95% confidence interval. Before Covid-19 (red line), there was no significant difference in price adjustment dynamics; after the outbreak of the pandemic, prices of offices in highly teleworkable counties were revised downwards more frequently than others.
The magnitude of the effect (the sum of the coefficients from 2020q2 to 2021q1) suggests that a one standard deviation increase in the value of the teleworking indicator (0.072) raises the probability of downward price revision by about seven percentage points. Such an increase would be equivalent to moving from the average county to the region of Lille or Lyon. This corresponds to a very large effect considering that the unconditional observed probability of a downward price revision was 5.8% prior to 2020.
Note: Effect of a one percentage point change of the teleworking indicator on the marginal probability of a downward revision of building prices in the office segment compared to other real estate segments for every quarter.
Are these effects consistent with a permanent deployment of teleworking, or are investors expecting the shift to be temporary? We run a rule-of-thumb exercise based on a simple asset pricing formula to measure the elasticity of vacancy rates to teleworking implied by the elasticity of prices to teleworking. It appears that county-level price declines are consistent with a permanent increase in county-level vacancy rates.
These developments could have different consequences for the economy. In the short run, the drop in corporate real estate prices and associated uncertainty may constrain corporate financing capacity through the collateral channel (Chaney et al. 2012). Reduced office-space demand also creates imbalances on the supply-side that the market will need to absorb. Increased vacancy rates in the commercial segment may eventually spill over to the residential real estate market as both markets are historically correlated. Future developments now depend on whether market participants overreacted in a context of heightened uncertainty or downplayed the future organisation of labour.
Barrero, J M, N Bloom and S J Davis (2021), “Why working from home will stick”, NBER Working Paper No. w28731.
Bartik, A, Z Cullen, E Glaeser, M Luca and C Stanton (2020), “How the COVID-19 crisis is reshaping remote working”, VoxEU.org, 19 July.
Bergeaud, A and S Ray (2020), “Macroeconomics of teleworking”, Banque de France Bulletin 213, Article 2.
Bergeaud, A, J B Eyméoud, T Garcia and D Henricot (2021), “Working from Home and corporate real estate,” November.
Bloom, N and A Ramani (2021), “The doughnut effect of COVID-19 on cities”, VoxEU.org, 28 January.
Chaney, T, D Sraer and D Thesmar (2012), “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment?”, American Economic Review 102.
Dingel, J I and B Neiman (2020), “How many jobs can be done at home?”, Journal of Public Economics 189: 104235.