Technology Companies In Cities Could Save Millions By Going Fully Remote

Now that the COVID-19 vaccine rollout has begun, it appears that companies will have the option of returning to offices in 2021. However, it's unclear how many companies will choose to return to their pre-pandemic styles of work.

Many employees enjoy working remotely. In fact, 32% of remote employees surveyed by PwC indicated that they would like to work remotely five days per week once COVID-19 is no longer a concern.

In addition, companies can save as much as a double-digit percentage of their overhead by shifting to a fully remote model. Technology companies, innovative and full of tech-savvy employees, are embracing their role as early adopters of new, post-pandemic approaches to work. Going remote is also sure to please investors, who generally support changes that lead to increased profit.

The decisions that technology companies make in early 2021 will have a massive impact on their cities. If a high percentage of companies decide to go fully remote, it could lead to the geographical fragmentation of technology communities, and a nightmare for local commercial real estate businesses.

Below, we analyze the financial benefits of fully remote work, and identify the cities where technology companies stand to benefit the most from permanently implementing it.

Table of Contents

• Technology Companies Can Save Millions By Going Fully Remote
  • Remote Companies Could Save Up to $9,000 Per Employee On Office Space
  • Remote Companies Could Save Up to $20,000 Per Employee on Payroll Expenses
• The Benefits of Going Remote Differ By City
  • San Jose
  • New York City
  • Los Angeles
  • San Diego
  • Chicago
  • Philadelphia
  • Phoenix
  • Houston
  • Dallas
  • San Antonio
• The One-Time Costs of Moving to a Fully Remote Model
• Non-Financial Considerations

Technology Companies Can Save Millions By Going Fully Remote

We calculated the potential cost savings of going remote for technology companies in the 10 largest U.S. cities. Not surprisingly, companies located in San Jose and New York City have the most to gain from moving to a fully remote work model. The table below shows what a 100 person technology company in each city could save annually by moving to a fully remote model, and the annual savings per employee.

To understand the financial impact of moving to a fully remote model, we identified the major considerations and calculated the impact of each. The two most important economic factors in a company's decision to go remote are office space and payroll. Below, we share details on our analysis of both office space and payroll, and explain how these factors impact companies in different cities. Our analysis covered the 10 largest cities in the United States.

Remote Companies Could Save Up to $9,000 Per Employee On Office Space

The most obvious way that fully remote companies save money is by not having office space. Typically, companies are expected to have roughly 250 square feet of office space for each employee. At $20 to $50 per square foot for the cities that we analyzed, this translates to $5,000 to $12,500 of cost per employee per year.

However, this entire amount is not saved. Fully remote companies must incur a different set of expenses to accommodate employees who are working from home. Standard expenses for fully remote companies are:

In total, these benefits add up to roughly $4,100 per employee. However, the most expensive benefit is the coworking space stipend, which many employees may not desire.

Together, these remote employee benefits offset 30-80% of the cost savings of eliminating office space depending on the city. Companies in expensive cities, such as New York, are likely to have the budget to easily cover these expenses. For cities with more affordable real estate, like Houston, there's less of a financial advantage to eliminating the office.

Source: PropertyShark

Remote Companies Could Save Up to $20,000 Per Employee on Payroll Expenses

The second largest financial benefit of moving to a fully remote model is saving money on payroll. For companies currently headquartered in some cities, payroll savings could outweigh savings from eliminating physical offices. It's important to keep in mind, however, that payroll savings would likely take multiple years to realize.

Companies that are fully remote can hire employees that are located anywhere in the country, or world. This allows them to attract the same level of talent at a more affordable cost.

Current employees can also choose to relocate to more affordable geographies, and have a higher standard of living on a lower salary. Recently, there have been several stories of companies deciding to pay employees in the same role differently depending on their locations. Redfin, for example, is paying employees who relocate to more affordable areas as much as 20% less.

However, not all companies are following suit. Reddit recently decided to eliminate all geographic compensation zones in the United States. The company's compensation will be tied to pay ranges in high-cost areas such as San Francisco and New York City.

In some cases, local average salaries are more than 40% higher than the national average. The average software engineer in San Jose, for example, earns 35% above the national average.

Source: Indeed

In our analysis, we calculated the cost that a 100 person technology company currently pays to employ its team locally. Then, we compared that to the annual salary the company would have to pay if it employed its team at the national average salary for each position. For simplicity, we assumed that technology companies were comprised of the roles listed in the chart above in addition to upper management, whose salaries would not vary.

We found that remote companies could save up to $20,000 per employee on payroll expenses. We also found that the financial benefit of a distributed workforce varies greatly depending on the city.

The Benefits of Going Remote Differ By City

The cost of office space and employee salaries differs significantly from city to city. As a result, it's helpful to take a deeper look to understand how technology companies in each city could financially benefit from a shift to fully remote work.

San Jose

Of the 10 largest cities in America, companies in San Jose have the most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in San Jose can save $2.5 million per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by over 10 percentage points.

San Jose is one of only two cities where companies gain more from the payroll benefits of being fully remote than the reduced cost of office space. In fact, 52% of the total amount San Jose companies would save from going remote is due to an expected reduction in the salary of their engineers.

Will technology companies in San Jose decide to permanently implement remote working? Adobe CEO Shantanu Narayen said that his company will continue to have its physical headquarters in San Jose, "but we're not going to have the footprint that we had." The choices that technology companies make in early 2021 could accelerate the trend of jobs leaving the city.

Total Savings Per Employee: $25,337 per year
Annual Savings from Office Space Per Employee: $4,583 ($34.73 per sqft)
Annual Savings from Payroll Per Employee: $20,754

Source: Indeed

New York City

Technology companies in New York City have the second-most to gain from moving to a fully remote model – as much as $20,430 per employee per year. That means a 100 person technology company in New York City could save over $2 million per year by going remote. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by as much as 10 percentage points.

New York City is home to over 300,000 technology workers. Not surprisingly, at $52 per square foot, New York City has the most expensive office rent of any city on this list. Given the scale of the local industry, it could be very disruptive to the city if technology companies decide to go remote to save nearly $9,000 per employee per year on office space alone.

Recent news has indicated this is a real possibility. As Charlie O'Donnell, Partner at Brooklyn Bridge Ventures, shared that "I don’t know a single one of the companies I've invested in, and I’ve invested in 50 or 60 companies who are still active, who has renewed a lease or taken new space."

Total Savings Per Employee: $20,430 per year
Annual Savings from Office Space Per Employee: $8,830 ($51.72 per sqft)
Annual Savings from Payroll Per Employee: $11,600

Source: Indeed

Los Angeles

Technology companies in Los Angeles have the third-most to gain from moving to a fully remote model – as much as $10,700 per employee per year. That means a 100 person technology company in Los Angeles could save over $1 million per year by going remote. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by as much as 5 percentage points.

At $40.29 per square foot, Los Angeles has the second most expensive office rent of cities we analyzed. This means that, just by eliminating their offices, Los Angeles technology companies can save almost $6,000 per employee per year.

In addition, engineers are expensive in Los Angeles. At an average salary of $114,938 per year, the cost of an engineer in Los Angeles only trails those in San Jose and New York City. The same is true for product designers. Will local salaries motivate companies to go remote and expand their talent pool?

Total Savings Per Employee: $10,700 per year
Annual Savings from Office Space Per Employee: $5,973 ($40.29 per sqft)
Annual Savings from Payroll Per Employee: $4,727

Source: Indeed

San Diego

Technology companies in San Diego could benefit financially from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in San Diego can save $750,000 per year by going remote. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by almost 4 percentage points.

At $30.14 per square foot, San Diego has the fourth most expensive office rent of cities we analyzed. This means that, just by eliminating their offices, San Diego technology companies can save almost $3,500 per employee per year.

San Diego technology companies employ 76,770 individuals, which represents 5.1% of the city's overall workforce. According to CBRE, high-tech job growth in San Diego grew by 15.4% from 2018 to 2019 – will this growth continue if companies decide to cut costs by moving to a fully remote model?

Total Savings Per Employee: $7,434 per year
Annual Savings from Office Space Per Employee: $3,435 ($30.14 per sqft)
Annual Savings from Payroll Per Employee: $3,999

Source: Indeed

Chicago

Of the 10 largest cities in America, companies in Chicago have the fifth most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in Chicago can save $400,000 per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by 2 percentage points.

Total Savings Per Employee: $3,996 per year
Annual Savings from Office Space Per Employee: $2,773 ($27.49 per sqft)
Annual Savings from Payroll Per Employee: $1,224

Source: Indeed

Philadelphia

Of the 10 largest cities in America, companies in Philadelphia have the sixth most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in Philadelphia can save $350,000 per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by almost 2 percentage points.

Total Savings Per Employee: $3,481 per year
Annual Savings from Office Space Per Employee: $2,475 ($26.30 per sqft)
Annual Savings from Payroll Per Employee: $1,006

Source: Indeed

Phoenix

Of the 10 largest cities in America, companies in Phoenix have the seventh most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in Phoenix can save $225,000 per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by over 1 percentage point.

Total Savings Per Employee: $2,204 per year
Annual Savings from Office Space Per Employee: $1,518 ($22.47 per sqft)
Annual Savings from Payroll Per Employee: $687

Source: Indeed

Houston

Of the 10 largest cities in America, companies in Houston have the eighth most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in Houston can save $200,000 per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by roughly 1 percentage point.

Total Savings Per Employee: $1,792 per year
Annual Savings from Office Space Per Employee: $848 ($19.79 per sqft)
Annual Savings from Payroll Per Employee: $945

Source: Indeed

Dallas

Of the 10 largest cities in America, companies in Dallas have the ninth most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in Dallas can save $200,000 per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by roughly 1 percentage point.

Total Savings Per Employee: $1,746 per year
Annual Savings from Office Space Per Employee: $1,303 ($21.61 per sqft)
Annual Savings from Payroll Per Employee: $444

Source: Indeed

San Antonio

Of the 10 largest cities in America, companies in San Antonio have the tenth most to gain from moving to a fully remote model. Between office and payroll expenses, a 100 person technology company in San Antonio can save $125,000 per year. Assuming this company generates roughly $20 million in annual revenue, becoming a fully remote company can increase its profitability by slightly less than 1 percentage point.

Total Savings Per Employee: $1,202 per year
Annual Savings from Office Space Per Employee: $1,080 ($20.72 per sqft)
Annual Savings from Payroll Per Employee: $122

Source: Indeed

The One-Time Costs of Moving to a Fully Remote Model

The analysis above captures the most important economics surrounding the decision to move to a fully remote work model. However, there are other economic factors that companies should consider. This includes:

Non-Financial Considerations

Deciding whether or not to move to a fully remote work model is a complex analysis. The largest financial factors are the cost of office space and potential payroll savings. However, there are other non-financial decisions that companies should consider. These include: