Office Space Future On the Line
After 6 months of the Coronavirus dominating our daily lives and with Labour Day now in the rearview mirror, we step cautiously into the fall season with the possibility of many of us returning to the office (some for the first time since the lock down in March) and students, teachers, and staff going back to school. Much has now been written and industry commentary provided about the prospects for office use in light of this virus lingering in our communities. The autumn show of leaves changing colour typically signals a return to the routine of work and home life after the summer season. However, this fall will be a fall like no other and now at mid September in BC, and other urban communities across Canada and in the US, we are starting to see a rise in new Coronavirus cases being reported. With schools re-opening, the weather changing, and rising case counts, many companies and their employees face the question of whether or not to return to the office. We are getting a sense for how companies are looking to utilize office space going forward and it can only be described as a “mixed bag” of approaches to “working from work.” And behind it all is the relevance of technology and how we value and spend our time each and every day.
Wall Street Journal (WSJ) reports that many companies planned to start bringing workers back to the office after the Labour Day long weekend (Source). Some of those plans have been adjusted as COVID-19 case numbers have either steadied or increased depending on the location. Employees don't want to return to offices where they don't feel safe and employers want to operate in a way to minimize any virus spread to its employees; and avoid further increases in case numbers, which could result in more lockdown measures slowing economic recovery. These concerns leave companies and commercial landlords with the question of what to do with all the office space currently sitting empty. Although, ironically, while office usage is generally at 50% or less in terms of employee count at a building at any one time, so far office tenants overall have been pretty much current with their rent. Some companies are taking a wait and see approach by prolonging their work from home policies into 2021 as we've seen from the tech giants like Facebook, Google and Twitter. Others, like outdoor equipment and supplies co-op REI based in the US Pacific Northwest, are making the proactive decision to decentralize their offices and move away from large central offices; while some are taking this time as an opportunity to modernize their offices and work environment. Regardless of the approach being taken, one thing is certain, the world of work has dramatically changed and that means all aspects of the office purpose will be changing with it.
First and foremost, we need to acknowledge that remote work is here to stay and in a much more pervasive way. This reality is one of the major factors underpinning all the industry conversation about office space utilization today. There will be a further shift (from pre-pandemic levels) to a more flexible work schedule that includes some form of work from home/remote component; although in the longer term, likely less than we are seeing now in the midst of the pandemic. One way to look at it is that we've moved from a world where work was highly location-dependent to where it is more location “agnostic” in that it really doesn’t matter in many instances where the office is located nor where the employee is working from to get the job done. Not that the real estate mantra “location, location, location” has lost all its luster as it still has importance. Employees may no longer need to relocate or may prefer living in the suburbs rather than central business district locations. Evidence for this preference is supported by the surprising bounce-back of the housing market, especially for single-family homes although record low interest rates have played a significant role. This trend was already present in California where many tech sector employees began moving out of hub cities, such as San Francisco, and into areas like the Lake Tahoe region for affordable housing options and access to the outdoors it offered. Now that some tech companies extended work from home policies into 2021, this shift may become more pronounced in other markets; especially those near growing tech hubs like Vancouver. And as work remote technology and methodology improves, for many office jobs, in theory employees can literally work from anywhere.
Another trend that may emerge, as noted by Ivan Kaufman, CEO of Arbor Realty Trust, is satellite or decentralized office space in the suburbs (Source). By taking this approach, companies could have some of their employees spend the majority of their time working out of an office much closer to home and computing to the main “downtown” office once or twice a week. Such "child" offices in the suburbs would have many of the same draws or amenities as their "parent" counterparts in the urban offices thereby providing opportunities for retail space for cafes, restaurants, and other services supported by the influx of office workers. One example is REI's decision to sell its brand new HQ office space before ever using it (Source). The building, just outside of Seattle, Washington was designed akin to a tech campus that would help attract the best available employee talent. REI is now looking to distribute it's workforce over a larger number of smaller offices closer to where employees currently live to reduce commuting times. There is also more flexibility financially being offered by leasing smaller spaces and in the middle of a pandemic-induced recession that also factored into the company's decision.
For other large companies, a central office or campus is still desirable. However, work process changes need to be made in response to the pandemic and evolution of computing and communication technology. This is the approach that Ford is taking with its campus in Detroit (Source). They are redesigning their half-century-old headquarters to accommodate more remote working, flexible workspaces, better bike and scooter access, and improved restaurants and cafes. To attract more young talent, Ford is taking a page from the Silicon Valley textbook turning this Eisenhower era office block into a modern millennial campus. Of course, part of the building’s redesign will include socially distanced desks, improved ventilation, and other measures to mitigate the spread of COVID-19. However, even though Ford is pushing ahead with this massive investment, they've also acknowledged that moving forward employees will have the option to continue working remotely. In fact, Ford’s work from home strategy is also a big part of their plans for their office workers at its headquarter offices in Dearborn, Michigan.
These office use approaches are linked with the common thread that, even after the pandemic is over, employees will have more flexibility in terms of where and when they work. One large piece of this equation will be what the smaller satellite offices look like for those who decide to move out of the city or work remotely. In Vancouver, there is an example of what one of these smaller satellite offices might look like. Arpeg Group of Companies is behind a new office development scheduled to open in December 2020 that is designed to offer the flexibility and amenities both companies and their employees are looking for in today’s office market (Source). Office space will include two levels of private office suites with an on-site wellness centre, event space and a contemporary Italian restaurant. Additionally, it will also include hand-sanitizing stations, large operable windows for fresh air, and other measures to combat the spread of Coronavirus. Instead of the traditional multi-year leases, common in the sector, they will offer more flexible 12-month agreements. From the industry’s perspective, however, shorter term leases will make it challenging for project financing and limit inducements, such as tenant improvements (TI’s), landlords will be prepared to offer new tenants.
The future of office space usage as we know it is clearly on the line and this pandemic has simply hastened the work from home trends that started a decade or more ago. It’s up to employers to determine “what they want the office to be” and there are more options than ever in that regard as a result of technology and employee preferences impacted by the pandemic. The silver lining for the office asset class is that rents have continued to flow to office landlords during this pandemic even with low employee office usage signaling that landlords intend to find new and relevant ways to keep their office footprint for strategic advantage in providing their services.
Tony Letvinchuk
September 18th, 2020
Sources:
https://www.wsj.com/articles/many-companies-planned-to-reopen-offices-after-labor-day-with-coronavirus-still-around-theyre-rethinking-that-11598175001
https://www.bloomberg.com/news/audio/2020-08-21/the-ceo-of-a-1-4-billion-reit-explains-housing-podcast
https://www.wsj.com/articles/rei-built-an-iconic-hq-because-of-covid-19-the-outdoor-retailer-wants-to-sell-it-11597263188
https://www.wsj.com/articles/ford-gears-up-for-the-post-pandemic-office-11598445075?mod=searchresults&page=1&pos=2
https://biv.com/article/2020/09/office-development-aimed-luring-remote-workers-back
https://www.youtube.com/watch?v=xTQACNqn96c&feature=youtu.be&ab_channel=CORFACIntl
https://www.wsj.com/articles/americas-offices-sit-half-empty-six-months-into-the-covid-19-pandemic-11600344000
https://www.brivo.com/impacts-of-covid-19/