New trends and opportunities for forward-thinking building owners
As we approach the third year of the COVID-19 pandemic, we are now beginning to see how the shift towards a more flexible office use is consolidating around important trends for the real estate industry. For operators and investors who are able to adapt, this presents an opportunity to attract better customers, increase their ROI and build a sustainable competitive advantage around technology. At the same time, for those who don’t accept the new normal, this might pose a threat and a real long-term issue. The challenge is to separate the signal from the noise.
In March 2020, for example, businesses all over the world were forced to close their offices and have their employees work from home, and we thought that the office was dead. Major tech companies announced they would never go back to the office again, and Zoom would replace in-person meetings forever. As the first wave ended and the first COVID vaccines were successfully rolled out in the western world, we thought that the reports about the office’s death were greatly exaggerated, and a hybrid approach would be the norm. Add the fact that, in a world where physical distancing has become the norm, organizations will actually need more floor space per employee instead of less, and the picture gets even more confusing. So what gives? Let’s dive in.
Bigger offices are better offices
We have just mentioned it but it’s worth diving in right away. Remote work arrangements are now part of the landscape. Extended lockdowns pushed businesses to work with Zoom and Slack, and employees now expect some form of remote work (and work-from-home arrangements) to be included in their employment package. This is not going away, and tenants are taking notes: a typical tenant might think it’s a good idea to downsize their office presence and renegotiate a new deal with a smaller office. However, we believe the opposite will happen, the office of the future will be larger and more spacious than what it is now. After all, employers are responsible for providing a safe and healthy workplace, and that means readjusting the office layout and furniture “to maintain social distancing of 6 feet between employees”, whenever possible: this is much more easily achieved by reducing the office density, and renting more square feet per employee. Landlords can leverage their existing unused real estate and offer aggressive deals to attract companies that are looking to grow.
The new office will be like a hotel
One clearly emerging trend is the hotelization of office space, a trend that the pandemic has accelerated dramatically.
The office of the future won’t just be a place where people sit in their cubicle and have sales meetings (remember, Zoom calls are here to stay). The office will have to compete on the very things where remote work is at a disadvantage: teamwork and collaboration, sense of purpose and community, and better work-life balance.
The challenge for property owners and real estate leasing companies will be to offer solutions to increase collaboration through technology and smart office design, invest in wellness solutions and better ventilation, offer amenities and services like child care, restaurants, bars, or on-premise healthcare providers. Have a team of receptionists? Perhaps it’s a good idea to turn them into a fully fledged on-site customer satisfaction team, maybe trained with some health and safety knowledge. The possibilities are endless, but the purpose is just one: making sure the tenants’ comfort and safety are top priority, and that the office building matches their values, like sustainability and work-life balance.
In the end, when employees go back to the office, they will expect a workplace experience that cannot be achieved at home, with opportunities for serendipity and meaningful face-to-face interactions. As employees are getting used to a more hybrid work routine, the trip to the office will be more purposeful. This is a great opportunity for forward-thinking landlords.
Demand for central locations will recover
The narrative around people fleeing the city and moving to the countryside has significant truths and makes for great headlines, but this rural renaissance might just be a fad: people are returning to the city, they really do, and they are ready to pay more. Here’s another counterintuitive trend: if people should maintain social distance, office buildings in suburban locations reachable by car should be preferred over busy central locations served exclusively by public transport, right? Well, not so fast.
If the trip to the office has to be purposeful, if the office of the future has to be eventful, if employees will expect more collaboration and amenities, what is better than an office space in a prime location, where the opportunity to exchange ideas and access to valuable services and amenities is higher? If the office space is becoming like a hotel, then what better location than an attractive, central location?
A new type of coworking space
The “hotelization” trend discussed above is a tough nut to crack for building owners: it means retrofitting their existing inventory, investing heavily in smart solutions and hiring a team that can handle technology. In a way, all this echoes what happened to the industry when WeWork popularized the concept of coworking space: a different type of commercial real estate, offering a high level of flexibility, plenty of amenities, collaborative space and large meeting rooms.
For larger real estate operators with multiple locations, this could be a profitable opportunity to offer tenants to lease multiple smaller offices rather than a single large one, which seems better for corporate customers interested in office rotation.
But does this mean that the future of office space is WeWork? Well, yes and no. Here’s yet another paradox: while it’s true that coworking spaces are better positioned for the future, they are designed for high-density communities of workers and close collaboration. In a post-pandemic future, tenants might not be too keen on sharing their space with teams from other companies. And from a pure operational standpoint, having a multitude of smaller tenants, startups, consultants and solo-entrepreneurs is a risk for profitability.
Having a more established corporate customer base, traditional real estate operators are still better positioned to tackle this challenge: turning their inventory into flexible office space, giving tenants the freedom to choose their best setup (office rotation, staggered start times, shifts, anything they want, thanks to smart access control solutions) and giving employees the opportunity to come and go as they wish, at the tap of their smartphone, without having to interact physically with a receptionist or employees from other teams, will prove to be the winning formula for a successful post-pandemic office experience.
Unused inventory can serve other purposes, too
Even though all these trends are emerging more strongly than ever, the uncertainty we currently live in means corporate customers are still afraid to spend money on their office space. Prices of existing premium office space in cities like New York or San Francisco still dropped 17% last year, and large companies like JPMorgan Chase are trying to sublet parts of their office, in an effort to reduce fixed costs. There is plenty of unused inventory, even in prime locations, affecting capital expenses and ruining the balance sheet.
So what to do with it? The Wall Street Journal has recently published an article where it describes how real estate operators are successfully transforming obsolete office space to serve purposes where demand for space is high: the first example is storage facilities.
With everyone forced at home by the pandemic, eCommerce has boomed: from groceries to personal care, from clothing to furniture, online shopping is taking a larger piece of the pie in the United States and abroad, pushing logistics companies to find ways to offer a large selection of products and quick, same-day delivery. Building owners and managers with unused inventory have an unmatched competitive advantage: offering the available space, or part of it, to logistics and delivery companies, to help them cover the last-mile delivery, from the distribution center to the customer’s door. This is incredibly important for perishable goods like groceries, so retailers are an obvious great fit as well.
Another opportunity is to turn empty office space into housing. Transforming commercial real estate into rental units is a good idea in scenarios where, for example, a Class B building goes empty for long periods or struggles to collect rent. In major cities like San Francisco, Chicago, Houston and New York, the trend is picking up, with an expected 12,300 converted rental units added to the market in 2022 . From a building owner’s standpoint this is tough, of course, as the conversion process is lengthy and not cheap, and local authorities play a major role in driving interest and incentives here, but repurposing an existing building for something new is a profitable idea, considering that office vacancy rate remains high and a simple conversion is cheaper and more environmentally sustainable than a complete demolition and construction. The Washington Post agrees: converting office buildings into housing may become the new normal.
A number of tech companies from Silicon Valley are also trying to ride this trend: turning unused office buildings into food distribution centers, boutique gyms and microschools turns out to be an effective way to make the most out of expensive unused inventory.
Conclusions
Even though it’s still early innings, we are seeing the strong emergence of specific trends that will impact the future of office space and, more broadly, the commercial real estate industry at large.
The pandemic is still affecting the way businesses are operating, and the high degree of uncertainty in the current business climate means that real estate investors and operators need to be able to offer flexibility and a new office experience that helps corporate customers and their workforce be successful. The office as we know it is going to provide lower ROI, and the winners will be those who invest in technology and forward-thinking solutions to make the office a place tenants and employees look forward to coming back to.
