The artificial intelligence industry’s leaders talk about a utopian future where machines take up so many human tasks that white-collar workers are replaced by the millions, a theme partly responsible for an exit from staffing and office-property shares this year.
“Cancer is cured, the economy grows at 10 percent a year, the budget is balanced — and 20 percent of people don’t have jobs,” Dario Amodei, the CEO of AI company Anthropic, said in an interview with Axios. Economists debate whether the impact will be so sudden and large, but investors see little reason to park money in stocks that might be vulnerable.
The Bloomberg US 3000 Office REIT Index was down more than 14.8 percent the year through December 5 compared with a 16.8 percent increase in the S&P 500. There are many challenges for investors around office property companies, said Jeffrey Langbaum, a senior analyst at Bloomberg Intelligence.
Mediocre space now requires investment to turn it into attractive space which is what companies now seek to lure employees back to the office. Commercial mortgage rates are higher and property value marks are likely lower than a decade ago, creating significant refinancing risk.
Then there is the AI job destruction thesis which is “impacting the stocks,” said Langbaum. “This is the next thing: AI and what it means for office staffing.”
Recent studies see some evidence of labor displacement, but nothing cataclysmic. Also, office vacancy absorption rates are increasing. Let’s take a look.
Job Creator or Job Destroyer?
There is no doubt that AI is augmentative technology in areas such as internet search, data query, and logic tasks such as writing computer code. Will it replace humans across thousands of other tasks? There are many cross-currents at work in the labor market today that make any bold prediction about AI and labor risky. Here is a review of research from economists who study the topic.
Martha Gimbel and her team at the Budget Lab at Yale University look at the distribution of workers across job categories – a concept known as occupational mix — since ChatGPT’s introduction. New technology often causes labor reallocation over time, rather than complete displacement.
Gimbel and team conclude that shifts in occupational mix were already underway before the introduction of ChatGPT. The economists find some evidence that labor churn may be occurring at a faster pace among early career workers. But overall, “our metrics indicate that the broader labor market has not experienced a discernible disruption since ChatGPT’s release 33 months ago, undercutting fears that AI automation is currently eroding the demand for cognitive labor across the economy,” they write in their Oct. 1 report.
Another study with the ominous title “Canaries in the Coal Mine?” looks at employment for early-career workers in occupations highly exposed to artificial intelligence. The study finds “substantial declines in employment” for these workers while employment for workers in less exposed occupations “continued to grow.”
This same study by Stanford University Professor Erik Brynjolfsson and co-authors finds that employment grows in jobs where AI use is augmentative rather than automative. If employees can do a task faster and more productively with a better tool, they can hold down costs and demand for these services might rise over time. What’s more, “AI may be less capable of replacing tacit knowledge, the idiosyncratic tips and tricks that accumulate with experience,” the authors add.
AI will impact labor markets, but just how much and how fast is unknown. Few studies come down on the side of large-scale job destruction. That narrative is “highly overblown,” said Suryansh Sharma, a REIT analyst at Morningstar.
“I don’t think service jobs as a percent of overall jobs in the U.S. will go down,” Sharma said.
Both Langbaum and Sharma say property stocks are still getting hit by post-pandemic currents. A back-to-work barometer published by Kastle Systems shows office occupancy stuck at just below 55% this year.
Bottom Line
The office space market is going through fundamental changes that have little to do with a sudden plunge in the white-collar workforce and more to do with post-pandemic trends such as work from home, a desire for better space, and refinancing risks.
In the near-term, AI companies and the service providers that grow up around them are likely to absorb more office space. Even now, vacancy rates are falling in major markets, notes Tom Kennedy, head of real estate investment strategy at JPMorgan Asset Management. “The AI trade has dominated everything,” Kennedy said. “I just don’t see the evidence that AI is impacting office demand.”
Key Takeaways
A version of this blog first appeared on MarketWatch
