What is the cure to the workplace pandemic?

We are now just over a year into this induced workplace (r)evolution and, to no one’s surprise, views on the role of the office are still polarized. Within commercial real estate (and factions of other sectors like banking) many corporate leaders are hoping for a return to old ways of working. 

However, inflection points are simply part of life on earth. Covid is a huge inflection point for the office world and now it’s the customer who will have their turn to write the next chapter of what it means to “go” to work. 

But Who is the customer? Is it the company paying the rent? Or is it the humans who inhabit the four walled space (an increasingly blurry thing to define)? The answer is of course both, but Covid has put the end-users (the humans) in the spotlight. 

For those whose income (and sense of purpose) is tied to supplying or servicing the world of offices, a beginner’s mindset has become necessary, to survive.  

So, I can’t think of a more befitting quote for the commercial real estate sector than this one: “If your mind is empty, it is always ready for anything, it is open to everything. In the beginner's mind there are many possibilities, but in the expert's mind there are few.” – Shunryu Suzuki. 

Wait, perhaps there’s one more…: “If it hurts to hear it, look for the truth in it. If it comforts to hear it, look for the lie in it.” – Naval Ravikant

Let me be clear though, just like in politics, there are very strong views on “both sides of the aisle”. Looking for the truth cuts both ways. If you’re inclined to challenge archaic office culture (like me) then maybe look for the painful truths that result from mandatory working from home like: a person’s home setup being so crappy that they can’t wait to get back to an office, new recruits being concerned about mentorship, or the unrealistic nature of working from anywhere for most companies (at least for now…). Likewise, if your views slant in the direction of “I can’t wait to get back to the way things were”, perhaps study the WHY behind what companies like Dropbox, Twitter, Spotify, Salesforce, Nationwide and a myriad of others are doing. 

It’s not about right or wrong, it’s about being brave in the face of change and pushing against EVERYTHING about work that has had end-users feeling like offices are failing them (Leesman has robust sets of data on this topic if you’re inclined to dive deeper).

Having set the stage a bit, I’ll now share some of my high-level observations, both from the vantage point of all the reading/studying I’ve been doing and on the “streets” talking to customers (both companies and humans!) this past year.

Covid has changed the job market forever which will in turn, change the office market forever

Leading employers are now laser focused on the holistic wellbeing of their employee base AND are doubling down on obtaining the best talent, wherever it may reside. Employees, while all faced with a unique set of challenges are telegraphing that they will no longer seek work that tethers them to a singular, fixed location. These forces are giving rise to “location, location, location” getting redefined. 

At one end of the spectrum, an “unbundling” of the office seems to be taking shape. Leading examples include deals between IWG Group and Standard Chartered Bank & NTT, but there are also many others such as Dropbox, Spotify, Revolut and many more who are creating this structure within their own workspaces and are actively seeking partnerships with Space-as-a-Service operators. In this regard, I think there is a major gap on the supply side of commercial real estate to support local/distributed ways of working. I also think there is a MASSIVE need for a leader on the platform/marketplace side to make transacting more seamless and allow an employee to wake up and be able to say to themselves “where will I do my best work today?” Technology has the opportunity to guide where work happens, maximize space utilization and encourage new ways of collaborating/building relationships (I think LiquidSpace and their CEO Mark Gilbreath have the best shot but there’s lots of other great players in this space like Meetingsbooker.com, Desana, Deskpass, PopDesk and in Canada, Flexday). The Work From Anywhere “WFA” movement is growing like a weed so it’ll be interesting to see who decides to “move where the puck is headed.” I hope that in addition to the burgeoning Space-as-a-Service sector, governments at the municipal/provincial/state level get involved to support bringing work to people, not people to work.  

At the other end of the spectrum, I’m a big believer that amenity rich, transit-oriented areas of CBD’s will be more important than ever. While I do believe the 15 minute city and more local ways of working are on pace to become a way of life, I think it’s going to take time for the supply side to catch up and make it easier for companies to purchase office space in more decentralized and on-demand ways. Until then, I think a lot of companies will take less office space in the best areas/buildings in the CBD and the rest will happen from home.    

“WFH (or better put, distributed working 2.0) is here to stay"

Barclays published a white paper which asserted that work from home is here to stay (impossible to refute at this point but I am still partial to “WFA” as “WFH” is binary and that isn’t where we are headed…) and are flagging a potential reduction in office space demand of as much as 20%, which while hotly contested by many, could be argued to be conservative. 

CBRE Canada also made mention of a potential reduction in demand, by as much as 10% in our recent Canadian Market Outlook. Using Toronto as an example, we illustrated what the impact on vacancy would be if we assumed a reduction of 10% in total demand because of on-going distributed work behaviours. The result was a potential increase of 400 bps in the vacancy rate. The question will become, is this structural vacancy (i.e. it never rebounds) or is it impermanent? No one knows for sure, but there is some smart money betting on a permanent reduction to demand. Either way, I can’t see any downsides for landlords to assume this is true and start to plan how they can make their buildings “stickier” for the end-users. And, as any reduction in demand won’t be linear, some buildings could literally become obsolete without a major overhaul (others, of course, should be repurposed regardless).  

Anecdotally, I also haven’t spoken to a single customer (and no I don’t represent “FAANG”!) who isn’t talking about downsizing and reimagining their office footprint (more on that below). 

“Big Tech" may be leasing more space, but the rest of the market is scaling back and retooling

According to Bloomberg, after scraping 4,700 earnings calls, there are resounding sentiments around scaling back and rethinking real estate footprints. Every day there continue to be more and more examples like HSBC, Grant Thornton, IBM, JPMorgan (+++). I can tell you from first-hand knowledge that there are many more who are choosing not to “go public” but are thinking the same.  

The obvious reason for this is cost savings but this isn’t just a CFO sentiment. CEOs and HR leaders are all laser focused on their employee’s wellbeing and utilizing office space for modern, not traditional purposes. The World Economic Forum’s recent video on Salesforce entitled “Salesforce says the 9-to-5 day is dead” says it all…

These MAJOR shifts suggest that employee productivity spend will increasingly migrate to the home, new office markets and new product types (landlords will have to catch up - more on that later). 

I can also support the Bloomberg article (speaking anecdotally) as I’ve had more conversations with CEOs/CFOs/Internal Workplace departments than I can count since Covid.  

I constantly hear things like:

• “We’ve hired 127 people since Covid and 53 have been hired in markets that we don’t have an office.” – Michael Serbinis, CEO at League
• “80% of our staff never want to commute again.”
• “Our staff have told us they only want to come to an office 1 day a week.”
• “Some of our younger staff have moved from downtown to the suburbs to get more space for the same rent.”
• “We know we need to shrink our footprint downtown and potentially add space elsewhere.”
• “We are calling Covid our ‘Skynet’ moment as we know our judgement day is coming. If we revert to the old way of doing things, it’ll be apocalyptic for our people, our spaces, and our company. Our employees have woken up during this time.” – Jeff Gwinnett, Director Workplace at Softchoice
• “Going forward, we are going to be seeking a variable cost structure from our real estate. The commercial real estate industry is going to have to figure out how to offer that at scale.”

And so on…

Covid has undoubtedly caused a structural shift for just about every company. Either you’re like Amazon and you’re looking to build the most human centric campus ever imagined (like their newly unveiled plans in Northern Virginia), you’re a tech start-up CEO looking to downsize and redefine WHY your employees come to the office (with much less frequency), or you’re anywhere in between.  

The point is that the veil has been lifted…

Smart companies know their employees are not willing to “snap back” to offices and the traditional paradigms of work/management that existed pre-covid. Despite the many VERY real stressors that the pandemic has induced, most seem to have mentally and emotionally moved on from the pre-covid workplace and its cultural norms. 

*Since I last edited my article KPMG has released a report indicating that as of August 2020 69% of major global companies intended to cut back on office space and as of late March 2021 this number is now down to 17%. What will happen with respect to demand of course remains to be seen but could this be misleading? My industry colleague, Pontus Kihlman shed some light on this for me: “Maybe, there is truth to the saying that it is harder to change the course of a big ship, than it is for smaller boats. So, the question is only about the rate and pace of change ... not if there will be change. The CEOs surveyed are from the most ‘influential’ companies, who are likely to have more complex campuses and slower processes for creating change. A note to the average broker to consider when reading that report: do they represent your own clientele, local market, and the typical small-to-midsize tenant you serve, where fixed CRE costs make up a bigger part of the budget? For them, agility might require more adaptable solutions sooner for the uncertain times that lie ahead. About the larger impacts: these ‘average’ businesses may actually have a larger footprint combined, than those surveyed. The 'big ships’ are simply slow at turning and changing course first ... so if we want to look at where the wind is blowing in general, we have to look at the smaller sailboats and yachts, that can turn faster.”

Some great analogies here and I wholeheartedly agree. Whether demand reduces or not, it’s going to change, that’s for sure!

I wrote a post on Linkedin recently that reflects Pontus’s sentiments as well: https://www.dhirubhai.net/posts/dave-cairns-5644a233_realestate-activity-6781647585275912192-ZTgD

The long-term lease could be a thing of the past...

Aside from very large organizations/requirements, for most companies, the long-term lease will never make sense again.  

Lease terms have been shrinking for years in major markets around the world, but now there’s likely no going back (when I played poker, we referred to the broader player pool as the “population” – I mean the same here with respect to “no going back”). Recent transaction information from CBRE indicates that average lease terms have decreased by two years and one month over the past three years, in key cities such as New York, Chicago, and Toronto. Since the pandemic started, CBRE has also been actively engaged with a wide cross section of companies to find out how important more flexible lease terms will be. In June 2020, 73% of the respondents polled said flex office will play “some kind of role” while 23% said a “significant role”. By September, the percentages went up from 73% to 86% and 23% to 36%!

Where before Covid there was some plausible deniability from the industry, now there is no getting around the fact that what a growing segment of the market (both big and small) wants: lease flexibility and the “outsourcing” of the workplace - is NOT (largely) what’s on offer. The “murky” part though, is establishing sustainable ways for landlords to offer more flexibility/service themselves or partner with operators to facilitate what the customer wants at scale. 

For this asset class to truly hit its stride, the game of “lease arbitrage” (renting a space from a landlord then charging a premium to the customer) needs to become a thing of the past. It was a fine approach for workspace operators and landlords in good times, but it takes a lot less than Covid to derail this model (for both sides). To get this right going forward, the word partnership needs to be synonymous with Space-as-a-Service, partnership between landlords and operators and the most CRITICAL partnership, with the customer. This means NOT just the company, but both the entity on the lease and its constituents, the end-users.

The good news is that, despite turbulence in this sector, the tide really seems to be turning. This is especially evident in announcements like CBRE’s (BIG!) investment in Industrious. This move validates what all the brokerage firms have been predicting for years, the massive growth of the flex office sector.  

While the need for an anchor, long-term tenancy isn’t going anywhere, increasingly the market will migrate to shorter leases that offer flexibility and service in every sense of the word. The future of the office will undoubtedly be flexible/serviced for a very significant portion of the market, one that can’t currently buy in the way that they want most often.  

*For context regarding this emerging asset type, in 2019, 50% of new office leases in the 50 largest markets were signed by flexible operators (not by traditional tenants) - source CBRE, JLL, Green Street Advisors

Both landlords and employers are going to need to find ways to "lure" employees back downtown

This global experiment has dramatically sped up the need for landlords and employers alike to make the workplaces healthier (not just physically…) & far more engaging. Each will have their own unique challenges in convincing employees to make their way back into the downtown core, as employees remind themselves of all the stresses associated with commuting to perform jobs that are often "heads down".  

To quote CRE industry leader Dror Poleg: "the internet will not stop most people from living/working in cities, just like it didn't stop them from listening to music or watching films. But it WILL enable them to live/work in many new ways and places. Good news for incumbents?"

To answer Dror’s question: maybe, maybe not.  

Those landlords and companies who acknowledge that change is not an option stand to prosper. Those who don’t…well there are lots of examples to point to in other sectors (Blockbuster comes to mind).  

The big issue for landlords will be shifting their mindsets and financial models to create a more consumer facing brand/product/experience (more on that later). Companies will face the challenge of ensuring that they never forget their real customer ever again - their employees. The difference for companies, however, is that they have WAY more autonomy to decide how productivity/wellbeing spend gets allocated. It doesn’t have to be an office, at least in the traditional sense.  

Either way, both need to get laser focused on more service, seamless technology, and consistency with respect to their workplace brand/product.  

A commodity product MUST become a consumer facing brand

Most office assets are intentionally fairly non-descript. For many decades, they have sought to appeal to a broad spectrum of customers and not "offend" anyone with their design/aesthetic. But now, people are craving more from the buildings that they spend so much time in. Accordingly, the world of offices is in desperate need of consumer facing brands. For all the challenges WeWork faced under the Adam Neumann regime, this is one of the things they got SO right! So off the back of the WeWork "movement" and now Covid, I expect we'll see more office buildings get packaged up, branded, and serviced as consumer facing products. 

As Covid has unfolded, there is a shared sentiment in the industry that it has expedited the exposure of the “middle” of the office market as customers are already becoming increasingly more demanding. 

Let me give you a real life example: I’ve been touring with Sensei Labs CEO, Jay Goldman recently for a post-vaccine office and despite there being a plethora of built out sublet spaces in the market, we are about to go firm on a “shell & core” sublet that Sensei will build out from scratch, all because they wanted to be in one of the best buildings in this sub-market (amenities, transit, healthy/safety etc.). We are still getting very aggressive pricing on this deal, but I find it compelling that they are willing to expend the time and resources necessary to build out a space from scratch when there is currently 3MM sq. ft. of sublet inventory (and growing!) on the market in Toronto. Additionally, Sensei didn’t want a “traditional” office space, they wanted big collaboration spaces that are conducive to a hybrid workplace. This had them wanting to control their own destiny through leveraging the services of Clearspace and their visionary CEO, Mark Goh. Clearspace has streamlined the entire design, construction, and procurement process better than anyone I’ve ever seen and on top of this, they charge a transparent fixed fee for their services. Service providers like Clearspace make it easier for companies like Sensei Labs to execute on their own behalf but I predict there will be increasing pressure on landlords to do this for their customers going forward (the best are already doing this). 

To quote Dror Poleg again: “being a commodity, a product with little differentiation, is what made office buildings attractive to investors. In 2021, it will become evident that offices are no longer commodities. They are businesses and need to be branded, packaged, serviced, and delivered to customers in a new way. This has always been true for a sliver of the office market, but this dynamic will overwhelm all major markets in the next 24 months.”  

Dror is on the money, as usual. 

However, despite being wholeheartedly in agreement with the above statement, I don’t want it to sound like no one on the landlord side has embraced change, they have.

Tishman Speyer has gotten fully into the flex office arena with a product called, Studio by Tishman Speyer.

Brookfield Properties now has a flexible workspace team and is actively assessing opportunities in their portfolio to support their tenant needs. They are about to deliver their first project at One Manhattan West in NYC very shortly.

Hines has been solving this problem for years with their Hines2 offering.  

HB Reavis and their UK CEO, Steven Skinner are hitting it out of the park with their customer centric mindset and Space-as-a-Service offerings on all their projects.

And, I can personally speak to the fact that in recent months, many landlords (both big and small) are entertaining partnership-oriented deal structures with workspace operators in lieu of a “traditional” lease.  

These early adopters, coupled with announcements like CBRE’s investment in Industrious, give me a lot of hope that both landlords and employers will indeed find compelling ways to “lure” people back to offices. This said however, I have no blinders on to the fact that it will equal less days in office (which means less space for many).

HOW brand gets deployed will widen the gap between winners/losers for both the supply side and for employers.  

As my friend John Ruffolo (Founder & Managing Partner, Maverix Private Equity) has said for years, adding the service layer on top of the physical infrastructure was always coming for office landlords, Covid has merely fast-tracked this inevitability…

Property Management 2.0 may emerge out of the flex office sector

Space-as-a-Service operators stand to become MUCH more than just operators of isolated pieces of space within a building; some of the more “advanced” players have their sights on becoming property management 2.0.   

As mentioned above, both landlords and employers will be forced to engage in more operationally intensive activities to excite/ignite employees to regularly use offices again. So, who better to support this than a sector whose backbone is in hospitality, technology, and flexible terms?

Ryan Simonetti, CEO of Convene summed this up perfectly on Twitter when he said: “Coworking as a standalone business doesn’t make sense unless you own the real estate. The lines between coworking operators and property managers are blurring & these things will become increasingly integrated moving forward. Why pay two management fees when you can pay one?”

Ryan makes a compelling point.

Whether he’s right or wrong isn’t really the point from where I sit. The point is that whoever is helping companies manage their facilities/the building needs a DEEP understanding of the evolving needs of end-users (I feel like a broken record!). Some of the existing players in this space will adapt, some could die, and perhaps Ryan’s vision will come to life. Dynamic times ahead on this front, that’s for sure.

And why shouldn’t it be the best in class coworking operators? They’re the experts at hospitality - they’ve been delivering service to their customers within office buildings for years. 

Caleb Parker said on Twitter: “There are 5 pillars to delivering #SpaceAsAService, and it’s time to extend these beyond the floor or two managed by the branded operator in a building. We need to cast a customer service net across the entire building for all customers of the building.”

The other stakeholders who stand to benefit from an integration of these two functions are companies of course. Aside from Fortune 500+, most companies who have multiple locations don’t have the knowledge, time, or resources (or all of the above) to create a workplace brand that is repeatable. While they were able to get away with this pre-covid, I think many realize that any inconsistencies in their workplace experience will now be starkly exposed.  

Companies are aware of the need to course correct, but they won’t be able to do it without a lot of help. Again, those best positioned to help them are the Space-as-a-Service providers and in turn, commercial real estate services firms such as CBRE which are continuing to arm themselves with new capabilities to respond to the need for more service/flexibility.

Some things to ponder…

I want to close this article with a quote from Clayton M. Christensen.

The quote is as follows: “If a company’s resources, processes and values don’t match the market, no management can save it.”

And some questions to leave you with:

Amidst all that we are suffering, do you still have a “knowing” inside of you that says not to look in the rearview mirror when it comes to how your work and life intersect?

Do people deserve to be trusted to perform their jobs wherever it suits their “needs of the day”?

Is progress a “returning” to something we already knew?

If you answer yes to any of these questions and you’re responsible for ANY aspect of the Future of Work, the humans that you serve are in capable hands!

Dave Cairns

*This article reflects my own ideas and does not necessarily represent the positions, strategies, or opinions of any current or past employer.