The impact of the COVID-19 pandemic on the office market is hard not to notice. Many office buildings sat empty for months on end, and now that some employers have adopted hybrid working environments, it begs the question: Where does that leave offices in the near term and beyond?
A recent report by CoStar states that a new formula for space is emerging as companies shrink their total square footage, swap private desks for collaboration areas and incorporate perks aimed at enticing employees back to physical spaces. And while companies have been quick to offload unused office space during the past couple of years, some are beginning to once again re-evaluate how much space they need.
Before we dive in to how that change is going to draw employees back into the office, let’s look at the reasons why workers are resistant to returning to the office — at least on a full-time basis — in the first place.
Cynthia Kantor, chief client value and growth officer of work dynamics at JLL, says “flexibility” is the operative word.
“Hybrid work adoption has increased demand for flexible office space and the need to double down on intelligent technology investments,” says Kantor. “Flexibility can help drive performance and belonging, helping support a company’s most valuable asset, their people, and ensuring they feel like they belong.”
She adds that as the definition of hybrid continues to evolve, tech-enabled offices will inspire employees, while continuing to connect remote and hybrid workers more seamlessly.
“Organizations that can empower employees and support flexibility with the right technologies and purposefully designed workplaces will reap the benefits through seamless, intuitive and personalized experiences, along with greater agility and connected culture,” says Kantor.
Joe Gorin, head of U.S. acquisitions and portfolio management at Barings Real Estate, echoes the sentiment.
“I think folks have gotten pretty comfortable working from home,” says Gorin. “This in turn creates challenges for employers to foster worker collaboration and ultimately innovation and productivity. I do think the pandemic has had a secular change on how people perceive work and how hard they want to work. In some ways, this new paradigm has highlighted those who are passionate about their job … but in other ways it has allowed another subset of workers to coast. It’s a real challenge.”
To make office space more flexible for workers, many organizations are retrofitting offices to meet employee demands.
A recent article by CNBC titled, How companies are shifting their office spend to lure reluctant workers back, notes that investing in other tools to make sure connections are still being made efficiently could mean spending more money even if square footage or leases are adjusted. The article cites Workhuman, an HR tech company that is nearing the end of its headquarters lease in the Boston area and is considering expanding its space as a means of providing a clean slate for adjusting to the new working ethos.
What exactly does this new era of office construction and design entail?
“We haven’t witnessed any material wholesale changes within the design and construction process for office buildings,” says Will McIntosh, global head of research at Affinius Capital. “Rather, developers are simply accelerating a trend that was always in process, which is a heightened focus on building amenities. Touchless technologies and tenant apps are also becoming more commonplace. From a tenant’s perspective, tenants are preparing for a flexible work environment going forward, so they are generally taking less space than in the past as they prepare for not having all their employees in the office at the same time on a regular basis.”
McIntosh adds that, in certain developments, HVAC systems are being upgraded to DOAS, or dedicated outdoor air systems, which allows for a significantly higher volume of outdoor air to be channeled into the air circulation and ventilation system. A much higher importance is being placed on functional outdoor areas, where connectivity is provided, so employees can get real work done in a fresh air environment.
Gorin agrees and says people are trying to activate existing buildings.
“You’re seeing a real focus on tenant amenities such as collaboration lounges,” says Gorin. “We have office buildings where we’ve created unique social areas such as a speakeasy and small sound insulated music studios with pool tables and TV screens. In essence, we’re bringing the creature comforts of home to the office building.”
A recent article by the Harvard Business Review titled, “Design an Office that People Want to Come Back to," says of prime importance is to ask employees what they want and need. Think of COVID as a catalyst to talk about what the best employees want from their workplaces, even if you can’t execute on every idea.
For most organizations, reverting to the status quo won’t be an option.
William Maher, director of strategy and research at RCLCO, says that means having amenities and features that promise to bring employees back to physical office buildings.
“Employees want access to outdoor spaces, as well as access to rooms or spaces to conduct private calls and meetings,” says Maher. “In our experience, free lunches and planned social activities seem to lead to increases in office attendance.”
Kantor echoes that sentiment saying a physical office reinforces culture, drives collaboration, increases cognitive productivity and innovation, enables professional growth, and brings a company’s best to its clients and employees.
“JLL is working with clients to design offices that make sense for their workforce, including, for example, larger collaboration spaces and less individual office workspaces, no-touch auto operators for entry and restroom doors, virtual training rooms for remote workers and increasing personal lockers for one-to-one desk to locker ratio,” says Kantor.
What does this mean for existing class A office buildings?
McIntosh says given the tenants’ flight to quality, landlords who have access to capital have been upgrading the grade of their amenity package to compete with the newest class A buildings.
“From an operations perspective, landlords are starting to focus more on the experience that’s provided to their tenants, which include more social events,” says McIntosh. “The flight to quality is real and will continue. For existing class A buildings to compete with newly delivered trophy assets, owners must invest to bring existing properties up to the amenity level of trophy quality. That means, at a minimum, conference facilities, outdoor terraces, EV stations, and high-end tenant lounges that offer space to spread out and food and beverage options if possible.”
Gorin concurs by saying it’s not a window dressing that’s important.
“Health and wellness amenities are also critical so improved air filtration within office spaces plus higher-end fitness centers more similar to full-scale premier gyms, locker rooms and bike storage areas are also important” says Gorin. “But it’s really about the activation of the common area and communal spaces. Ultimately, we need to outcompete the competition. In some ways it’s offensive, and in other ways it’s defensive. Because if you don’t do it, you won’t land the tenant.”
Looking to the future, it seems a hybrid working model may be here to stay, despite the changes and features added to bring the workforce back to the office. However, with the possible diminution of the office sector, there may be a light at the end of the tunnel for current office buildings investors and operators. The possibility of repurposing these buildings into multifamily housing and other uses may be an option.
“Conversions have historically had little impact on office tenants as they predominantly have occurred in buildings that have been vacant for several years and do not compete with the class A office market,” says Kantor. “That being said, conversion activity is driving the largest volume of office inventory removed on record, with multi-housing being a large portion. On average, office remains the most valuable property type among major sectors on a per-square-foot basis, but outpaced price growth for multifamily housing has narrowed pricing spreads, improving the economics of office-to-residential conversions.”
She adds that housing affordability crises in major markets are spurring incentives for residential conversions. Most gateway markets have created or proposed new incentives since 2020.
McIntosh adds that across most U.S. markets, architects are busy trying to assess the ability to repurpose these outdated office buildings into multifamily housing.
“They are generally finding that the physical challenges and cost of such repurposes do not provide a compelling investment opportunity for prospective investors,” says McIntosh. “In particular, suburban office buildings are generally too deep, with challenging floorplate sizes, and window line issues for conversions to make sense. And someone actually has to want to live there.”
Additionally, he says, some tenants won’t want to vacate, and some office building cores just don’t work for residential. The pre-war high-rises in certain cities seem to provide the highest opportunities for repurpose.
“Bottom line, almost all cases of outdated office buildings being repurposed to multifamily will require a type of public/private partnership where municipal governments incentivize redevelopment through long-term tax breaks, and creation of new opportunity zones where clusters of outdated office buildings are concentrated,” says McIntosh.
While the future of the office sector seems uncertain, the sensibilities of working professionals have clearly changed and it will be up to office building investors and operators to make it work.
Denise Moose is special reports editor and video production editor at Institutional Real Estate, Inc.