Return to Work Is Coming for Your Pandemic-Era Home

After three years of living in her dream home in a Texas community called Rocky Creek Ranch, Donna Rutter is giving it up to move closer to the accounting firm she bought in the nearby city of Fort Worth.

Rutter spent most of her 30-year career as a CPA for large firms in Dallas and Fort Worth. Even before Covid, she had a work style that allowed her some flexibility. She didn’t have a central office she went to every day, but she had clients she travelled to visit on site. That schedule allowed her to build a home in Rocky Creek, about 20 minutes from downtown Fort Worth.

Then the pandemic hit and she gave up travel and went fully remote. Now, with the pandemic-influenced lifestyle waning and the importance of being in the office growing, she has been drawn back into the workplace but for different reasons. In 2021, she bought her own firm, renamed Donna R Rutter CPA PC, and started working from her desk each week.

“Small businesses weren’t really set up to work remotely,” said Rutter, 59. “My clients want me in the office. They want to meet with me.”

The only problem, she said, was that her office is near central Fort Worth, making her commute about 45 minutes each way. She decided that is too long, and is moving closer to her new business. Her roughly 11-acre ranchette is now on the market for $1.75 million.

Rutter is just one of many homeowners making the decision to relocate closer to work.

According to a September report by Redfin, about 10% of home sellers in the U.S. are looking to move because of return-to-work policies, indicating that after more than three years of remote-work policies dominating behaviour in the housing market, the in-person, 9-to-5 lifestyle is picking up some steam. Average office attendance last week was 50.5% of the pre pandemic level in February 2020 across 10 major U.S. cities, including New York and San Francisco, according to Kastle, which tracks security-badge swipes into the buildings they secure.

In May and June, Redfin’s study surveyed more than 600 people across the country who were likely to sell and move within the next year, according to chief economist Daryl Fairweather. The findings follow more than a year of announcements from major corporations—including Apple, Walt Disney, Google and Tesla—calling remote employees back to the office.

In Seattle, local real-estate agent David Palmer of Redfin said that so far this year, he has received about 10% more inquiries than in 2022 from clients looking to relocate closer to the city because their jobs require a hybrid work schedule.

“I have a buyer who moved out of the city during the pandemic. He now works for Google and, long story short, he needs to commute three days a week and it’s about a two-hour commute each way,” he said. “So he’s actively looking to buy something.” Palmer’s client didn’t respond to a request for an interview.

Google has announced it will consider office attendance records in performance reviews, The Wall Street Journal reported in June. The company began calling employees back to the office a few days a week in April 2022.

Austin-based real-estate agent Matt Holm of Compass said that since Elon Musk called his employees back to the office, he has had several clients looking to move to the city to work for, or with, Tesla, where the company is headquartered. Last year, Musk told Tesla employees they are required to spend at least 40 hours a week in company offices, The Wall Street Journal reported. He sent the same message to employees of his rocket company, Space Exploration Technologies Corp., or SpaceX, which also operates in Texas.

Finding affordable housing in Austin for some of the incoming workers can be tough, Holm said. Those who can’t, often settle down in nearby markets, such as San Antonio and Killeen, because they are cheaper, he said. In October, the median sale price in the Austin metro area was about $444,000, down 6.5% from October 2022, Redfin said.

But for the employees who can afford Austin prices, Holm added, the demand has been a welcome boost to the housing market, which has seen slowed sales due to rising interest rates. On average, homes in the Austin metro area are sitting on the market for 63 days, Redfin stated, up from 53 days during the same period in 2022.

The sentiment around relocating for in-person attendance is mixed, Palmer said, “I have some clients who don’t mind, others who are a bit peeved.”

Rutter and her husband, Steve Lewis, 61, built their roughly 4,000-square-foot ranchette in late 2019. They outfitted it with vaulted ceilings, a heated saltwater pool, a dog shower and an outdoor kitchen, among other features.

While the home they have bought closer to the city is just 20 minutes from her office, it is about 1,000 square feet smaller and sits on about a third of an acre. She declined to disclose the purchase price. “We don’t have as much room,” she said, but added she is excited for a change and a shorter commute.

The couple’s ranchette is garnering interest from potential buyers, according to their listing agent, John Giordano of Compass. Rocky Creek Ranch is a desirable area because of the steady demand for ranchettes and because of its proximity to downtown Fort Worth, he said, adding that homes there rarely come up for sale.

Most property investors spend considerably more time watching interest rates than bond markets.

That makes sense. The Reserve Bank cash rate has an obvious relationship with mortgage repayments, borrowing capacity and investor sentiment, while government bonds can seem far removed from what someone will pay for an apartment in Sydney or an office building in Melbourne.

But the bond market can provide one of the earliest indications that the price investors are willing to pay for property is changing.

That became evident last Thursday, when Australian shares suffered their worst trading session in months. The S&P/ASX 200 fell almost two per cent, with property among the rate-sensitive sectors caught in the sell-off as government bond yields moved sharply higher.

Australia’s 10-year government bond yield pushed to around 5.4 per cent, close to its highest level in 15 years, against a backdrop of rising global yields and renewed concern about inflation and the direction of interest rates.

For property investors, that matters because the government bond yield is effectively one of the reference prices for money.

An investor buying an Australian government bond is receiving a return while taking comparatively little credit risk. Property comes with tenants, vacancies, maintenance, leasing costs, illiquidity and the possibility that the underlying asset falls in value, so investors generally expect to be compensated for accepting those additional risks.

A property yielding five per cent therefore looks considerably more attractive when a 10-year government bond yields three per cent than when that same bond is yielding more than five per cent.

That does not mean property values automatically fall every time bond yields increase. Rental growth, scarcity, lease structures and the quality of an asset can all outweigh movements in rates, but it changes the return investors require and therefore what they may be prepared to pay.

SG Hiscock & Company made that point in an ASX Investor Update, arguing that real, or inflation-adjusted, bond yields can be particularly relevant to property because real estate is fundamentally a long-duration investment whose value is derived from future income.

The first place investors can often see that repricing is the sharemarket.

A house or commercial building does not have a price that changes every few seconds. An Australian real estate investment trust does.

A-REITs can own billions of dollars of shopping centres, offices, warehouses and other property, but their securities trade continuously on the ASX. When expectations around interest rates and bond yields change, investors can immediately alter what they are willing to pay for those property earnings.

That can create a situation where the value attributed to a portfolio on the sharemarket falls even though the underlying buildings have not changed hands and their independent valuations remain unchanged.

The two markets simply move at different speeds.

Mark Ferguson, Head of Charter Hall Maxim Property Securities, has previously described direct property valuations as lagging the listed market. Writing for Charter Hall during an earlier period of rising interest rates and bond yields, Ferguson noted that listed property was already pricing increases in capitalisation rates and falls in underlying property values before those adjustments had fully emerged in direct-market valuations.

The effect can be substantial.

Consider a commercial property producing $1 million a year in net operating income. At a five per cent capitalisation rate, that income implies a value of $20 million.

If investors subsequently require a 5.5 per cent return while the property’s income remains unchanged, the implied value falls to around $18.18 million. At six per cent, it falls again to roughly $16.67 million.

Nothing necessarily happened to the building. It could have the same tenant paying the same rent under the same lease. What changed was the return required by the person buying it.

That is also why income growth becomes so important.

A well-located property with constrained supply and strong rental growth can increase its earnings quickly enough to absorb some of the pressure from higher required returns. An ageing office building facing vacancies, refurbishment costs and an approaching debt refinancing could instead be hit from several directions at once.

Debt adds another dimension because property is one of the economy’s most capital-intensive asset classes.

Higher market rates can increase the cost of financing an acquisition or refinancing existing debt while simultaneously increasing the return investors expect from the property itself. For developers, the consequences can be even more pronounced because higher construction finance costs can coincide with lower anticipated end values.

If that happens, a project can be squeezed from both directions: it becomes more expensive to deliver at precisely the time investors become less willing to pay yesterday’s price for the finished asset.

The direct property market generally takes longer to reveal that adjustment.

An A-REIT can lose five per cent of its market value in a trading session. An office building may not transact for another year. Owners can reject lower offers, transactions can be withdrawn and valuers must wait for comparable sales to establish new evidence.

That lag is one reason listed property can be useful even for investors who have no intention of buying a REIT.

The same principle eventually extends to residential property, although houses and apartments are generally valued using comparable sales rather than capitalisation rates.

Residential property is particularly sensitive to credit. Higher bond and swap rates can influence bank funding and fixed mortgage pricing, while higher borrowing costs reduce the amount households can service.

If prospective buyers can borrow less, the number of people capable of paying yesterday’s price can shrink. Vendors may initially resist that adjustment, resulting in fewer transactions rather than immediate price falls, before motivated sales eventually establish new comparable values.

For investors, rental growth can provide an important buffer. Rising rents can help offset higher financing costs, just as increasing commercial rents can compensate for some expansion in capitalisation rates. Investors relying primarily on capital growth while accepting a low rental yield have considerably less protection when the cost of money rises.

That is why movements in listed property and bond markets deserve attention beyond the trading floor.

They provide a constantly updating view of how investors are pricing interest rates, debt, future income and property risk, often months before those changes become obvious in direct transactions.

For an A-REIT investor, that means looking at gearing, debt maturity, hedging, interest cover and the discount or premium to net tangible assets rather than simply chasing the highest distribution yield.

For a commercial property investor, it means testing what happens to valuations if capitalisation rates move 25, 50 or 100 basis points higher.

For residential investors, it means understanding mortgage costs, borrowing capacity, realistic rental income and how much of the investment case relies on future capital growth.

The cash rate will continue to attract most of the attention in Australian property. But investors looking for an earlier indication of how the market is repricing risk should also be watching the bond market.

Property prices might take months to respond to a changing financial environment. The price of money moves considerably faster.

Return to Work Is Coming for Your Pandemic-Era Home

Some sellers are putting properties on the market to be closer to the office, as companies shift back to in-person work and hybrid schedules

Rising Australian bond yields are putting pressure on listed property and the cost of capital. Here’s why A-REITs can signal changes in property valuations before the direct market moves.