To executives expecting to save on office space when some employees continue working remotely post-pandemic: Not so fast.
Makeshift desks and kitchen tables have sufficed for many people working from home to avoid COVID-19. However, permanently remote workers tend to buy or rent larger dwellings—5 to 7 percent bigger, on average—to accommodate their home offices. They also spend more of their income on housing than office workers do, according to new research by Christopher Stanton, the Marvin Bower Associate Professor at Harvard Business School.
Companies that fail to offer remote employees a housing premium, which Stanton estimates at roughly 3 percent of their office-based salaries, could find themselves at a disadvantage when vying for top talent.
“You eat into about a third of the savings from reducing office space because of a need to provide money to households to compensate them for home offices or bigger dwellings that make remote work possible or at least easier,” says Stanton.
Since the COVID-19 pandemic started, American companies have debated how to set salaries for newly remote workers, with some firms, such as Facebook, saying they will adjust compensation based on the cost of living in a worker’s local area. Stanton’s research suggests that when employees start working from home but continue living in the same commuting zone as their former offices, their employers should consider passing on some of the savings as a “remote premium” to offset increased housing costs.
The need for such a premium is not equal among all remote employees, however. Stanton estimates that the top 20 percent of earners either would not need to increase the size of their homes to accommodate work space or could afford to do so without company help. Workers that earn less or live in high-cost regions are more likely to need such a premium, according to the study.
“In places where home prices are low and the housing supply is relatively elastic, meaning that you can add more housing somewhat easily, the need to compensate individuals to move to bigger houses is not as extreme,” Stanton says. “But in places with very expensive housing, especially relative to the price of commercial real estate, that need for compensation goes up.”
Where companies would save the most—and least
Using commercial and residential real estate data for 31 commuting zones in the United States, the researchers identified where companies would save the most and least if their employees were to work from home for the long term.
Of the regions they analyzed, office space savings after accounting for increased housing costs were lowest in Fort Worth, Detroit, Baltimore, Sacramento, and Charlotte, according to the working paper Housing Consumption and the Cost of Remote Work, which Stanton wrote with HBS research associate Pratyush Tiwari. Employers and workers jointly would save a net $1,411 (Fort Worth) to $2,443 (Charlotte) a year per employee from remote work after accounting for housing expenses.
The researchers found the largest net savings from remote work in San Francisco; Austin; Seattle; Washington, DC; Boston; and New York. The net savings in these areas ranged from $4,475 (New York) to $6,030 (San Francisco) per year after accounting for increased housing costs.
“Of course, new demand for housing that can accommodate remote work may push up prices for larger dwellings,” the researchers write, adding that some employees might opt to move to places with large homes at lower prices, offsetting some of these costs.
The researchers also examined Census Bureau data on households in which at least one adult worked remotely between 2013 and 2017. They found that such households spent between 6.5 and 9.8 percent more of their incomes on housing—with renters at the lower end of that range and homeowners at the higher end—than non-remote households in the same region. They also reported that most remote workers lived within driving distance of a major city prior to the pandemic.
The cost to support a remote workforce
If all US employers compensated newly remote workers to keep increased housing costs from cutting into other spending, it would cost $15 billion annually, the researchers estimate. That total assumes that the number of remote workers nationally will triple because of the pandemic, a figure based on surveys of business owners that Stanton and his colleagues conducted in 2020.
Over the course of the pandemic, most business leaders have become acutely aware of the social costs of transitioning to remote work. These include the deterioration of office culture and the disappearance of spontaneous interactions, as well as isolation and Zoom fatigue.
“These tend to be really top of mind for most executives,” Stanton says. But there are less obvious costs, too, as his latest research reveals.
“You need to be thinking about someone’s home infrastructure,” he suggests, “just as you would think about designing their office space in the office that you control.”
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