The Prof G Pod with Scott Galloway - The Future of Work Part 1: Get to HQ

Episode Date: February 22, 2023

Today, we’re kicking off a special 3-part series answering your questions around the future of work. Peter Cappelli, the George W. Taylor professor of management at the Wharton School and author of “The Future of the Office,” joins Scott to discuss what HQ looks like in a post-pandemic world.  After our conversation with Professor Capelli, Scott gives advice on seeking opportunities to get to HQ in a remote working environment. He then discusses converting unused office space into residential buildings, and ends with his thoughts on the gig economy.  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehoursatpropertymedia.com. Again, that's officehoursatpropertymedia.com. Today, we're kicking off a special three-part series answering your questions around the future of work. My number one piece of advice to young professionals, get to headquarters. Here to discuss what HQ looks like in a post-pandemic world is Professor Peter Capelli, the George W.

Taylor Professor of Management at the Wharton School and author of The Future of the Office. Professor Capelli, let's bust right into it. Can you explain what you see as the lasting or enduring changes to the workplace in the post-pandemic world? Well, you know, this never makes news to say that something is sort of pretty much like it was before, but it's remarkably true. And the big change is this remote work thing, which has not come back to where it was before. And, you know, why that is, is an interesting and important question. And that would certainly be the biggest legacy of the pandemic. Also, probably the biggest change in the workplace in my lifetime, I think, if this persists. Yeah, I've always thought when people say, what's the most enduring change from COVID?

I've said it's remote work. It just, it feels like we're not going back to the before time. So, assuming we're not, what does that mean in terms of the asset class of commercial real estate? And what societal impact does it have when we no longer have this pillar of communication, socialization called the office? Well, I guess I'm not so persuaded that we're not heading back in that direction of returning to the office. I don't think we're going to go back to where we were before, but I think we get fixated on the fact that most employees, but it turns out not all, like remote work. Most everybody likes some sort of hybrid model. The number of people, the percentage of people who want to never come into an office

again is pretty small. And they're probably smart in that because if you're working at a place where you're never going to go back into the office, somebody in that organization, probably the CFO, is going to say, well, why is Peter an employee at all? Let's just make him an independent contractor and boom, cut you loose, right? So hybrid is a kind of interesting story. And we fixated a lot on why employees like it. But, you know, it's important to remember employees like all kinds of things they never get. It depends on whether it works for the employer or not. And the jury is still out on whether it works for the employers. As far as I can tell, employers more or less seem to prefer that employees come back into the office.

And, you know, why they haven't done that yet, I think, is partly because they waited so long to bring them back. And they haven't had a really clear story as why they should come back. And as a result, they're afraid, rightly, of just irritating too many people. But my sense is, and maybe this is just proximity bias, but in Manhattan, I remember seeing all these articles at the end of 2022 saying office occupancy is hovering around 50%. And it's having trouble busting through that. That to me, and then you're seeing all these articles, what are we going to do with these buildings? Or can we rehab them or transition them to apartments? It feels as if as an asset class, and this is an enormous asset class, it's under enormous attack.

Assuming, say we go back three days a week instead of five, isn't that a net destruction of 40% of demand around office space? That's the issue with hybrid, right? So if you think that we're going to move to a hybrid model, you're not cutting any office space. You're just telling people, well, you can come in three days a week, but the offices still stay. If you're going to say you can go permanently remote, then that's a very different story. And then you're absolutely right that that's a big issue for office space. And the CFOs like the idea of permanent remote because you get instant cost savings. But very few employers that I've heard are going in that direction. And if you look at the data on office occupancy, it has been trending

slowly up with little peaks and little valleys. So here's just the caveat on the real estate issue. One thing to remember is offices are never full, right? So on a typical day before the pandemic, maybe three quarters of people were in the office. Some people are out sick, some are on vacation, some are visiting clients if it's white collar work. It's not like we're talking about 100% occupancy is something to expect. We had a conference here with the Philadelphia Federal Reserve. They ran the conference on this issue of commercial real estate. It's been a little while. It's been about a year. But at least as of a year ago, the evidence was commercial real estate was holding up surprisingly well, and that the clients were not demanding recontracting or price cuts or those sorts of things.

I think the big issue is what happens to the urban communities. If you only have 60% of the people in the offices, there's only 60% of the people eating lunch, and the restaurants's only 60 percent of the people eating lunch, and the restaurants are only 60 percent full. So those are the things which I think are the immediate hit, and that is the office business, which does not seem to be roaring back. If you think about the relationship we have with work, I mean, my understanding is, I read somewhere, a third of our relationships begin at work, romantic relationships. If you no longer have as many opportunities for random encounters with friends, colleagues, mentors, potential mates, doesn't that have a big societal impact? I think it does.

It's a great point. There's an article in a study in the magazine or the journal Nature that looked at the communication patterns of remote workers. I think it was comparing before the pandemic to during the pandemic when they were remote. And one of the things that you see from their study is that the communication networks narrow. And so you're talking to a few people more, but you're talking to a lot fewer people. And as you say, the other issue is that your connections to people are just not as good when you only see them remotely. And my colleagues in neuroscience say that you can see this in a kind of physiological way,

you know, when they pop you into MRIs. There is something about looking at a person face-to-face, which is still quite different from looking at them on a screen, and your opportunities to learn are greatly diminished. So it's quite a different story when we ask people who have been in their companies for many decades or so about working remote as compared to somebody who's never been in your organization at all, which is a big, big challenge then.

I remember when I was in consulting in the 90s and the guy who runs Europe, I used to see him all the time. And I said, you get here a lot. And he said, yeah. He said, you always like to make sure they know that you're there and that you're doing a good job. And then I read somewhere saying that you can be doing the same job, but if you're at HQ, you're twice as likely to get the top job or get a promotion. And I've seen that you have kind of coined a similar phenomenon, the Zoom ceiling. Can you explain that? Connections to people matter a lot. So, you know, if you have a choice, and increasingly we do, between being in the office or being home, your career is quite likely to suffer if you are home and your peers are in the office.

If you're on a team and you never see your teammates, do you really feel like you are connected to them and that you're kind of pulling together in the same way? You know, it'd be kind of surprising if you were. I mean, isn't the distillation of all of this that while you can, get into the office as often as you can? Yeah, if you're ambitious, right? And I think this is maybe one of the either good things or pernicious things, depending on which side you fall down on, in that this creates this big

selection issue, right? Are you raising your hand to indicate that you're ambitious or not? And then the bosses will take that as a sign. And this is why we hear people who would like to stay home talk about trying to equalize this. You know, what can we do to make sure that remote workers aren't left out? And, you know, the problem there is it's really hard. If you're not in the office, first, your supervisor has to do a lot more work for you. You know, they have to keep you in the loop for things that are going on that might not be sent to your email, like what's the mood in the place? What's the boss thinking about this project? How are the other stakeholders that might

have some interest in this feeling? And one of the questions to ask, I suppose, is do we really think employers are going to fund that, provide more supervisors or give them more time to deal with remote workers to support them appropriately? You know, I don't see them doing that, frankly. So I would imagine you get a lot of inbound inquiries or consulting opportunities. Let's pick a Philadelphia company, Comcast. In the before times, people show up at 8 or 9 on a Monday, leave around somewhere probably between 6 and 7, five days a week. If they called you and said, all right, broad brush, what does the Comcast relationship between employees and the office look like moving forward? What are your sort of best practices for the intersection between the office and the employee base? Well, I can tell you what they're actually doing. And I should say,

I'm not a consultant to them. And one of the ways not to make money as a consultant is to say, it all depends. It helps to scare people if you want to make money as a consultant, right? To tell them this is all coming and you better get used to it, et cetera. So their view is employees should come back and that's really important. And I think they have slowed down the pace of bringing people back because they feel that people are kind of in some ways embedded in working at home and they don't want to try to just yank them too quickly. but they started a while ago bringing people back in a bit, two or more than they were before. Here's the, I guess, the big takeaway of things to think about if I'm an employer. They start with this issue of figuring out first,

why did people like working remotely in the first place, right? The second is thinking about whether you could give them more of the flexibility that they want without necessarily having to have remote work. So for example, if you think about sick leave, right? Sick leave is an expensive thing for employers because it's an accrued liability on your balance sheet that you have to offset with assets. Employees, if they could work from home when they were sick and wouldn't need a sick day, you know, that's kind of a win for both parties, right? If they could do that and don't need a PTO day. I think another lesson for employers is if they're going to have hybrid to engage the employees in working out the schedule.

So you guys work it out. And if somebody needs an adjustment, you work out the adjustment. It's not clear that remote work helps the employer in any way, but it helps the employees. So the question for employers is, can you give them more of what the employees want without doing it in a way that's going to mess up your own internal operations? I've thought, and I'm curious to get your thoughts on this, I thought that there might end up being a new classification of worker, and that is, loosely speaking, a care worker, someone who has aging parents, kids at home, maybe struggling with something themselves in terms of their own physical or their mental well-being. And the employer might say, all right, you quote-unquote

qualify for a different expectation around the location from which you work. I mean, at least at NYU, we found out that a lot of people were commuting so far. So, it strikes me there might be a real unlock here for a different classification of worker who could really benefit other than wanting to take their dogs for a walk in Prospect Park and get coffee whenever the hell they want. But, you know, people who, it's a societal benefit, if you will. Remote work could really be accretive for society. for it is that we could reduce commuting time with better highways in and out of the city and stuff. And what it did, of course, was just cause people to move further out. And one of the things that remote work is doing already is causing people to move further away from their offices, right? So I wouldn't expect that opportunities for more hybrid, more remote work would simply solve the current problem. I think it

would create more commuting, longer commuting, which ends up for a lot of people putting them sort of back in the same boat. However, I think your general point fits into lots of other stories which have similar problems, like the aging workforce, for example, right? Which is not new that lots of people approaching retirement age say they want to keep working in some way. Employers are complaining they can't find people and they can't find experienced people. And yet you have all these people who are retiring and would like to keep going part-time or in some way. So having that kind of off-ramp has been a goal for a long time. Employees want it,

employers should want it, it makes perfect sense for them. And remote work makes that much easier to do. The big thing about remote work, I think, is it's kind of proven to employers that at the very least worked a lot better than you ever thought it was going to. Now, they thought it was going to be a disaster. And of course, it's not a disaster. It worked pretty well. So the opportunity to offer that to employees, let's say, as you say, who have caregiving responsibilities and employees who are at their end of their career and would like to keep their hand in in some more modest way, don't need to be in the office as much because of that. Could we think about opening up the

arrangements for work in ways which are more flexible and could accommodate more people? Now, why does this work for employers? Because they can pay them less. Pretty simple. And remote work has proven that you can make this happen. So I think that is a good idea. Now, I don't know if I'm seeing anybody doing that, but it certainly would seem to make sense. Peter Capelli is the George W. Taylor Professor of Management at the Wharton School and the author of The Future of the Office. He's also a research associate at the National Bureau of Economic Research in Cambridge and was recently named by HR Magazine as one of the top five most influential management thinkers by NPR as one of the 50 influencers in the field of aging and was elected a fellow of the National Academy of Human Resources. He joins us from his office in Philadelphia.

Professor Capella, we really appreciate your time. My pleasure. Thank you. We'll be right back after this break to answer a few listener questions all related to the future of, wait for it, work. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc.

Welcome back. Question number one. Hello, Scott. My name is Matthew. I'm working for a life insurance and annuity provider in St. Petersburg, Florida. When discussing the changing working landscape as a result of the pandemic, you often said having an office will be seen as a perk to young talent. Well, after over a year of working remotely, I can honestly say that this is getting old and I'm falling in line with your prediction. A few months back, my company announced that it will now be fully remote. I understand this decision as our CEO is looking at both the cost savings and the preferences of my colleagues, of which the vast majority voted for a 100% remote working environment. I love the company and the people

I work with. Unfortunately, my passion is not where it used to be and I'm concerned for my career prospects if I stay put. You often advise young professionals to get to HQ. What should someone like me, who loves who they work with but hunger for the in-office experience, do if there is no more HQ? Should I look for a new opportunity or should I roll up my sleeves and challenge myself to be more adaptable and figure out how to make this work? Thank you for all your insight and shirtless photos. You're welcome, Matthew. So generally speaking, I think to develop into a seasoned professional and for professional reward and emotional reward and future earnings potential, I think at some point you want to have a decent tenure in an office working with other people. I can't imagine

any person elevates to a very senior role and does really well professionally without having developed the skills that are sort of unique to being in an office and that certain creativity, electricity, whatever you want to call it, that happens when you bump off of people. So let's assume, and it sounds like you see the value there, you want that to be part of your career path. Okay. Now the question becomes, well, how? How do you do that in a thoughtful way, given you have a good job? One, if you're in an organization where you have a really strong relationship with your manager and you can trust them and they're emotionally invested in you and your success, I would be very honest and say, will there be opportunities to be in an office?

And if so, I'm very interested in those opportunities. If you don't see those opportunities, I would do the following. I would look for another job. And then when you have an offer, you can then go back to your current company and be, and be very transparent and say, I have another offer. I'm thinking about leaving. And I love it here. I love the people here, but I want to be in an office. And at that point, they might decide to figure out a way to create an opportunity. Great jobs are like great partners. You don't want to let them go because you don't know what the next thing holds. You just may hate the culture. Who knows? You may end up with just a shitty boss or end up in a company that's not doing well. So a good spot,

you want to hold on to your seat, but go do a market check, see if you can get another offer. It's very motivating for a company to figure out what to do for you when they risk losing you. And even before that, if you have the type of open, honest dialogue with someone you trust at your work, go in and say, being in an office is really important to me. Are there going to be any opportunities? And who knows they might find something for you. Thank you so much for the thoughtful question. Matthew from St. Petersburg, Florida.

I went to the Dolly Museum. I took my boys to see the Dolly Museum. And it was one of the most culturally rewarding things I have done in a long time. And it made me feel really good about St. Petersburg. What vision that St. Petersburg, Florida said, I know, let's spend 50, 100, 200 million bucks or whatever they spent to create a museum focused on Dali. I mean, that just took real vision.

And you know what? That shit works. That shit works. Well done, St. Pete. Next question. Hi, Scott. This is Holland and I'm based in the Twin Cities in Minnesota. Recent data from the National Bureau of Economic Research are confirming that commercial office real estate has been shattered by work from home. It finds, quoting, a 45% decline in office values

in 2020 and 39% in the longer run, end quote. I always hear people claim that all this office space should be converted into residential. That's never made sense to me from a logistical or economic perspective, especially if what has always been a source of tax revenue becomes a source of local government subsidy to create this housing. Besides, most of the office space only has exterior windows with very large cavernous centers. That seems a tough constraint when trying to create profitable housing options. The question is, is there any scenario in which converting all this skyscraper office space into apartments is economically viable? Thanks for all you do, Scott.

Holland from the Twin Cities. I get the sense you could answer this question better than me. You strike me as someone who understands real estate and has thought about this. A New York Times article from December 2022 reveals that there's about 998 million square feet of office real estate in the U.S. that's available and without a tenant. This represents about 13% of the market. Again, I would have thought it was much higher than that. A study from the National Bureau of Economic Research found that office values are likely to remain 39% below pre-pandemic levels. Again, I would have thought it was much higher than that. A study from the National Bureau of Economic Research found that office values are likely to remain 39% below pre-pandemic levels. So you have a decline in an asset class of about 40%. And keep in mind, this asset class is highly

levered. So if you just bought a building, right, maybe you levered up, put 30% down of equity down and you got a loan for the other 70%. It means your entire investment has been wiped out. It's important to note that most office buildings are not laid out as residential spaces, as you referenced. A recent analysis by Moody's found that in New York City, only 3% of the buildings tracked would be viable for apartment conversions. Think about that. It sounds simple, right? Oh, we'll let you just convert it to housing and solve the housing problems. Between 2016 and 2021, only 218 office spaces across the U.S. were converted to other uses.

Think about that. Basically nothing. Nothing's been converted. 40% were for multifamily housing, creating over 13,000 apartments. Again, drop in the bucket. The cost to convert offices to an apartment building could cost about $400 or $500 per usable square foot, which in many cases costs more than building a new development. Peter Drucker said in the 60s that office buildings would be like the pyramids, and that is we would come to marvel at them, but they would serve no

functional purpose. And Midtown, you can already feel it in Manhattan. Midtown during the day feels just kind of flat. So the bottom line is commercial real estate owners have been in denial, thinking that it's going to come back. It's not. Some tier A stuff does really well and will hold on. Some kind of mixed use space and cool areas, fine. They'll be fine. It'll be like malls. I mean, the majority of the BNC malls just went away. It'll take longer than people think. It'll take 10 or 20 years. Some of it will be converted. There'll be interesting stories of conversion. All the numbers we just read are just a fraction. But what happens here is simple. This asset class gets the shit kicked out of it. And some of it converts, but most of it

either gets torn down or just lies empty or consistently has to cut its prices, be recapitalized to recognize a new world. And we end up with an asset class that loses a third, 40%, maybe even 50% of its value. Thanks for the question. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording to officehoursatpropertymedia.com. Our producers are Caroline Shagrin, Claire Miller, Andrew Burrows.

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