The Executives Edge: Landlords, Leases, and Laughter: Navigating the Office Space Dilemma
Nearly one year following the end of the COVID-19 pandemic and a soft recession, a few questions remain the same across the nation:
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Despite a shift in my morning commute to Cresa’s new Chicago HQ instead of the gloomy East Loop, we are back with the 8th edition of none other than The Executives Edge. In today’s edition, I will address the previously listed questions as there seems to still be a bit of confusion in the market. Let’s dive in!
So, why aren’t organizations in the office?
I think we all know the answer here, but for those who are uncertain, much of the vacancy we now see is a result of the pandemic's work-from-home (WFH) policies. While the pandemic was something no one could have predicted, it influenced global change in the way we live our lives in general, thus affecting work. As the tide shifted and the world was deemed safe, a power struggle emerged between employees and employers. Can you believe that? For once, and in many cases without union backing, employees told the corporations that signed their paychecks that they wouldn’t return to the office, and guess what the corporations did… they listened. I, for one, am still recovering from the ease with which employers listened to their employees.
That said, there are indeed some organizations that still occupy the office. In fact, the occupancy rate to date hovers around 50% (see latest report from Kastle Systems below), but has yet to exceed 60% on average nationally post-pandemic. This number may seem alarming, but the truth is, the office was never 100% occupied. Pre-pandemic, average office occupancy hovered around low-to-mid 70%, which effectively puts us at 71% of our pre-pandemic office occupancy numbers. So what’s all the chatter about? For starters, media outlets need to sell a story, just like I need to sell office space. Second, the way we approach work today is different. Today, most organizations operate on a hybrid model instead of a 5-day work week. I personally work on a 6-day work week (call me old-fashioned).
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All of which leads me to the second and third questions.
?As mentioned above, the average office occupancy nationally is 50.6% to date. So, no, not all office buildings are empty. Instead, what we saw over the course of 2022 and 2023 was a flight to quality. Instead of seeing activity spread across the CBD, we saw it focused in the submarkets with the best quality assets (the chart below reflects most in-demand amenities). If you’re in Chicago, think West Loop and Fulton Market (hate to break it to you, but there is a difference). That said, there is still activity in the Central Loop, East Loop, and River North (the South Loop doesn’t offer much office space in general). The activity seen in the remainder of the CBD (Central Loop, East Loop, River North, and South Loop) is typically renewals, which is why we don’t get to read about them in Crain's Chicago Business . The anchor tenants (tenants that occupy a significant amount of space in a building), on the other hand, create a frenzy when they decide to move to a new market. Prime examples include Google and J.P. Morgan Chase, both of which have recently made commitments to the Central Loop. More to come on this in another edition of The Executives Edge.
?So, why isn’t your landlord paying you to lease space?
Well, if you are moving to a highly occupied building, a trophy asset (currently decreasing in availability across Chicago due to high occupancy), or a building within an area that is in high demand, you have a lot of competition, and frankly, the landlord isn’t as incentivized to lease to you if their asset is already stabilized and producing abundant returns for its investors. So, your tenancy in these markets is like a cherry on top. That said, depending on the market and the landlord's health, you can create something every broker likes to push in our industry called leverage. Poor landlord health + low occupancy levels = opportunity for you, the tenant.
How do I get my employees back into the office?
?All of this is great, but what’s the point if you can’t get employees back into the office? Your shareholders certainly won’t understand the unnecessary expense. However, the most consistent times I have seen employees gather across several industries are when there is a community created amongst the workplace. Community can take several forms and is typically centered around a common interest. CIBC, for example, hosted a March Madness watch party recently that brought employees from all areas to bond over basketball. Other organizations have done this internally over refreshments and snacks. Cresa specifically does a great job by hosting group workout classes for employees. All of which enhances internal relationships and creates the stickiness that will grow your retention numbers.
Should I bring my employees back into the office?
Inclusive internal communities + employee participation/excitement = higher retention, and higher retention stimulates our local economy. So many of us are saddened by the dramatic change of our favorite shopping corridors without realizing that we are a part of the cause and effect. Without employee stimulation within the Chicago CBD, many retailers cannot sustain their tenancy, which takes away from the city that we know and love called Chicago. I truly believe that it has to be a group effort to bring back the vibrancy that the retail sector once played in Chicago. It exists in Fulton Market and the West Loop, but this has a lot to do with higher occupancy and attendance levels. More to come in the next edition of The Executives Edge.
Two important questions you should ask yourself.
That's all of this edition of The Executives Edge! Now, time to hit the phones. DM's open as always.
President at Project Performance Group
8 个月Nice article!