Near the height of pandemic lockdowns and workplace closures, on April 20, 52% of American workers were working from home, according to Morgan Stanley Research. But the work-from-home trend has been rising over the past two decades as internet connectivity, real estate costs, and the desire for better work-life balance have encouraged employers and workers alike to move in this direction.
Even so, the size and speed of the pandemic-driven switch constitutes a huge and radical experiment, which poses a lot of questions that are relevant to investors. Can work at home be productive? Will the benefits outweigh the costs? What will the economic ramifications be? Will workers and employers embrace the trend? Will the trend acceleration last, or will it revert back to baseline as we get closer to the pandemic’s conclusion? If the trend does prove enduring, which companies and industries will benefit — and which will be harmed?
Productivity
We’ll get to other aspects of the problem in a moment. If work from home (WFH) turns out to be significantly damaging to workers’ productivity, it is unlikely to last. If employers look at this bottom line and come away disappointed, then when the pandemic has run its course, we believe that we’re unlikely to see anything more than a slight elevation of the WFH transition trendline already established.
Surprisingly, there have been relatively few robust, objective studies of WFH productivity. Many of the “studies” mentioned in media reports are actually simply surveys of employer and worker sentiment, which are interesting, but don’t get to the heart of the matter. One of the few solid studies was published back in 2015 in Oxford’s Quarterly Journal of Economics; interested readers can find a copy of the published study here. Stanford researcher Dr Nicholas Bloom had the good fortune to be teaching the founder of the Chinese travel website Ctrip [NASDAQ: TCOM], James Liang, in one of his MBA classes. Liang was in a unique position to propose and execute a robust, controlled study in work-from-home productivity. Ctrip at that time employed some 16,000 workers, from whom they recruited cohorts to work from home and to remain in one of the firm’s call centers. The study lasted nine months. All those in the WFH cohort were required to work from a dedicated room — other than a bedroom — into which no one else was permitted to enter during the workday. They worked four out of five days at home, and were required to spend one day working at the central location — at that time, because TCOM had an aggressive schedule for new products and needed to ensure training was adequate. Productivity could be measured objectively by time spent in the company’s application available to take calls, calls taken, and issues resolved.
The results were striking. Performance increased 13%. 9% was determined to be due to more minutes worked per shift (fewer and shorter breaks, and fewer sick days) and 4% from more calls taken per minute (attributed to a quieter and less distracting working environment). Worker attrition declined by 50%, dramatically decreasing turnover costs. The firm’s expenditures on office space declined. Overall, the firm’s total factor productivity increased between 20 and 30%. The results were so dramatic that at the conclusion of the experiment, the firm rolled out the WFH option to all employees. Interestingly, however, half of the employees in the WFH cohort, and two thirds of the employees in the office cohort, chose office work rather than WFH at the experiment’s conclusion. They cited loneliness, isolation, and resultant depression as the reasons they would rather work in an office environment than from home.
These results offer a degree of objective support for similar results obtained by more ad hoc surveys and other less rigorous research on the topic.
Dr Bloom has been a go-to interviewee during the covid lockdowns due to his academic stature on the topic of WFH. Despite the results of his research, he is not a dyed-in-the-wool advocate. He notes several worrisome characteristics of the enforced WFH regime created by pandemic lockdowns that could mitigate or entirely remove the productivity benefits he found. The lack of adequate IT infrastructure, the lack of dedicated workspace in the home, and the interruption of school-age children all degrade productivity dramatically, according to Bloom. Further, Bloom believes that at least some level of face-to-face collaboration is critically necessary for team productivity, especially in creative and innovative work. He fears that enforced WFH without enough periodic face-to-face interaction will result in less innovation, and thus less productivity, in coming years.
Taken together, the data suggest that WFH can actually offer cost and productivity benefits to companies — provided that the IT infrastructure is adequate; that workers have dedicated space and are not multitasking while taking care of children; and that team-oriented workers have some opportunity for periodic in-person, face-to-face contact with their collaborators.
Since that’s the case, the fundamental bottom line indicates that the this trend could last even after the pandemic has run its course, and will likely settle down to an adoption rate that’s elevated from the pre-pandemic baseline. State Street [NYSE: STT] CEO Ron O’Hanley commented in the company’s first-quarter earnings call: “I think it’s surprised everybody, not just at State Street, but elsewhere, how effective one can be in WFH. And I would have to believe that over the medium and long term, that you’ll see us having less [office] space than we do today.”
Who’s Helped and Who’s Hurt?
Obviously, the primary immediate impact of an accelerated WFH trend is commercial real estate, particularly office towers in high-density urban areas. These will suffer both from the relocation of workers to home offices, and from overall risk aversion. Some commercial real estate may be facing structurally higher vacancy levels, and some urban areas may never recover fully to pre-pandemic absorption rates. REITs and banks with big loan books focused on these areas may be enduringly challenged.
Of course the flip side is that many corporates in these same high density areas will be able to reap significant savings by reducing their office footprint — including financials.
Obvious secondary effects related to this affect food retailers primarily focused on office workers, such as breakfast-oriented stores (for example, Starbucks [NYSE: SBUX], which generates approximately 80% of its revenue from breakfast) and lunch-oriented fast casual stores (for example, Chipotle [NYSE: CMG]).
On the other hand, the same forces may be a tailwind for REITs focused on single-family housing.
Second, noting Dr Bloom’s emphasis on IT infrastructure as key to ensuring WFH productivity, we think that the acceleration of WFH could lead in turn to an inflection in 5G rollout. Workers, especially in households where work videoconferencing and entertainment streaming are happening simultaneously, have already been commenting on the need for better broadband. That will directly benefit the companies that are at the forefront of 5G. It could also indirectly advance other themes that depend on 5G, such as factory automation, city automation (so-called “smart cities”), autonomous vehicles, and generally, the internet of things (IoT), as WFH-driven 5G acceleration opens doors for more data-hungry infrastructure.
Potential 5G-related beneficiaries include T-Mobile [NASDAQ: TMUS], American Tower [NYSE: AMT], Crown Castle [NYSE: CCI], SBA Communications [NYSE: SBAC], CommScope [NYSE: COMM], Ciena [NYSE: CIEN], Corning [NYSE: GLW], Lumentum [NASDAQ: LITE], II-VI [NASDAQ: IIVI], and Xilinx [NASDAQ: XLNX]. Of course, second-order beneficiaries will include many cloud software and cybersecurity firms who will see business expand as WFH and 5G accelerate overall business digitization trends.
Again, this seems to be an area where the pandemic is serving to bolster and accelerate existing tech-related themes, and may help some of them come to earlier fruition.
Investment implications: Although the social and economic ramifications of an accelerated WFH trend are complex, we believe that real estate trends, and data infrastructure trends, will be most significant if the pandemic’s WFH push creates a lasting inflection. We see benefits for corporates who can reduce overheard while maintaining productivity, though this will require an investment in IT infrastructure and corporate culture. Companies that can ensure their remote workers have the productivity tools they need — including periodic in-person collaboration — will do best. Companies that provide this IT infrastructure, especially in 5G, will benefit. And secondarily, companies that can piggyback on better broadband will benefit as well, especially in cloud software, robotics, and the internet of things. The market is in a state of obvious exuberance, and as we note in our market summary, may begin to experience significant volatility as the election draws closer. This is a good time for investors to be sharpening their pencils and working on their buy lists.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
