To the moon and back: It isn’t just Elon Musk driving office demand
Last year was a challenging one for the technology sector. First, valuations plummeted: the S&P 500 Information Technology Index lost 29% in 2022. Then, fundraising dried up: VCs invested about a third less in 2022 than in 2021. Most recently, Silicon Valley Bank collapsed, partly because last year’s fundraising drought had forced the bank’s tech-dominated depositors to withdraw cash to fund their operations over the past 18 months.
This “tech recession” was sparked by last year’s realisation that money might not remain cheap forever. After nearly 15 years of patient, low-cost capital, even some well-established tech companies had grown comfortable remaining indefinitely unprofitable, or at least had become accustomed to reinvesting their profits in expensive moon-shot projects rather than returning cash to shareholders. As central banks hiked interest rates, however, investors lost much of their patience and started to demand nearer-term income.
Technology companies have been forced to adapt in response. The “growth-at-all-costs” ethos that characterised the sector over the last decade seems to have given way to a culture that instead emphasises fiscal discipline, efficiency, and productivity. Last summer, Sequoia told its founders that “the era of being rewarded for hypergrowth is quickly coming to an end”.
Large, profitable tech firms are also changing to cope with the new environment. As Microsoft’s Satya Nadella said earlier this year, “we in the tech industry will have to get more efficient”, and “we will have to show our own productivity gains.”
In short, as the investor Brad Gerstner titled a recent activist letter to Meta, it is “time to get fit”.
Office markets will be impacted by this shift. Although efforts by tech companies to trim costs have raised questions about the durability of demand for office space in gateway markets, initial indications suggest that the tech sector’s renewed focus on efficiency is driving a return to the office, not a retreat from it.
While commentators will continue to debate whether remote work is conducive to innovation, the actual behaviour of managers suggests that a large portion of the technology sector believes in the value of in-person work. Accordingly, as tech companies look to “get more efficient” and show investors “productivity gains”, management teams are increasingly instructing their employees to come back to the workplace. And, as the tech labour market has cooled, employees are complying.
The list of organisations that have summoned their employees back to the office seems to get longer each week. Earlier this year, Bob Iger told Disney’s workers that he expects them to be in the office four days a week starting in March. Reed Hastings, Netflix’s outgoing CEO, described work from home as “a pure negative”. And, on Twitter, Elon Musk invited Tesla employees who wish to work remotely to “pretend to work somewhere else”.
As technology companies look to get more productive, we may see office occupancy continue to rebound at a faster pace, and to a higher equilibrium level, than the office bears had expected.
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