Numerous clients and colleagues have been asking how COVID-19 is going to affect office leasing once this pandemic is over. While there are certainly many different opinions on this topic, here are some potential major trends in the office market that we believe are being affected by the COVID-19 virus:
1. Density. In the past decade, there has been a movement in the office market toward a denser, more collaborative working environment. This movement has cut across industries and is prevalent in all areas of the office market, from technology companies to service companies to institutional investors. Many companies, instead of building out separate offices for their employees, have embraced open floor plans with cubicles, desk sharing and long tables with employees (and their computers) sitting next to and across from their colleagues. There is not much privacy, but there is the hope for more collaboration between colleagues and a more inclusive environment. This movement has resulted in densities for office space moving from a typical standard density of 4 persons for every 1,000 square feet of rentable area to 6-8 persons in some markets on the West Coast—and some tenants are even pushing for a density of 10 persons. Additionally, requests for greater density have resulted in new, creative office designs and have helped tenants have greater productivity in less office space.
Now, the highly contagious COVID-19 virus strikes, and, all of a sudden, it is important to maintain certain health protocols that are at odds with higher density. As a result of COVID-19, the US Centers for Disease Control and Prevention (CDC) now suggests that employees practice social distancing (maintaining at least a 6-foot distance between individuals and thus no hugging, shaking hands or close human interaction); wear gloves and avoid touching surfaces (the virus may stay on a surface for days, and, if touched and then the nose, mouth or eyes are touched, infection can occur); often wash hands, with soap and for at least 20 seconds (to kill the virus if on the hands); avoid common area bathrooms (the virus can easily be in such areas); wear a mask when in common areas (the virus spreads in the air); and, if not feeling well, stay home rather than coming to work. These CDC suggestions are particularly relevant to older employees and employees with certain existing health issues because these employees appear to be more susceptible to the adverse health effects of the COVID-19 virus. These new health protocols are antithetical to high-density workplaces, and, as a result, high-density workplaces will need to be modified, often before employees return to the office. How to do so will take a lot of creativity from architects and office space designers, and they are already at work trying to resolve these issues. That being said, it will be incredibly difficult to fit the same number of employees in the same square footage as pre-COVID-19 without either having only a portion of the work force in the office space at one time (some are suggesting an alternating work schedule with one-half of the employees in the office one week and the other half, the next week) or leasing additional office space, if available. Will tenants rework their office space to move away from an open concept and return to separate offices or take some middle road? Either way, the cost incurred will likely be significant. Part of the answer will depend on the second trend, identified below. While it is unclear at this time, it certainly appears that high-density office space may be a trend that has peaked and is now diminishing.
2. Working from home versus being in the office. Working remotely, rather than in an office, has been a trend that some experts have been touting for years, to the dismay of the office market. Many experts have postulated that demand for space in office buildings would decline over time because more and more people would simply choose to work from home. Although there has been some movement over the years in this direction, if anything, it has been a very slow trend. There have been some businesses (for example, some consulting and accounting firms) which have desk sharing or “hoteling” arrangements, and this has helped them reduce their office square footage needs. As technology has improved and made it easier to work from outside the office, there has definitely been a lot more businesses and employees working from outside, whether that is from home, on vacation or from somewhere else. However, this trend does not appear to have materially affected demand for office space.
Now, COVID-19 hits, and everyone, whether wanting to or not, is working from home (if possible). After an initial disruptive period, most have accepted working from home, and some have even grown to really like it. This is a brave new world for many older employees who have in the past been hesitant to work from home (often due to being intimidated by the technology required to work from home). These older employees have always been capable to work from home but never did so because they didn’t have to. Now, this employee has no choice and has adjusted to working from home and really likes it and actually is now considering working from home in the future at least one day a week. On the other hand, many employees working from home miss the collegiality and collaboration and the social interaction enjoyed in an office setting and can’t wait for offices to reopen. These employees are tired of working from the kitchen table and being subject to constant interruptions.
Also, those businesses that have been employing desk sharing or “hoteling” arrangements now have to adjust to address all of the new health protocols created by COVID-19. For example, how will employees now feel about sharing a work station with strangers who may or may not be contagious with the COVID-19 virus? At least for now, with these new protocols, most will have an issue with sharing work stations and will not agree to do so. So where will these employees now work if the desk sharing and “hoteling” concept is no longer workable? Unless the company has extra office space or leases additional office space, most likely the work will be done remotely. One other point to consider is that companies (especially those companies that will not be returning to their existing office space until late 2020 or early 2021) will be reviewing whether or not productivity was the same, better or worse during this work-at-home period caused by the COVID-19 virus. If productivity is similar or better, then companies can save a lot of money by having employees (at least some of them) work from home for a period of time and thus reduce their office space footprint. At this time, it is unknown whether or not COVID-19 is the issue that supercharges this work-from-home trend; however, it would not be surprising if, post COVID-19, employers will offer their employees work-from-home flexibility, at least a few days a week or part of the time.
3. Corporate culture. As noted above, over the past 10 years, many companies (especially in the technology sector) have embraced the high-density, open floor plan office space model. One of the reasons is that the open floor space plan—with room for coffee bars, pool tables and ping pong tables—helps create a corporate culture that emphasizes youth, vibrancy, inclusiveness and a “work hard, play hard” ethos. A company’s corporate ethos and culture reflect its purpose and values, defining the company. Often, a company’s corporate culture is expressed in the composition of its office space, including whether or not there is an open floor plan, with or without offices, and meeting areas, breakrooms and corporate lounges, and a company’s office space becomes a tool to help attract and recruit employees. This is important because companies with a solid corporate culture tend to be more successful and have less employee turnover. Now, with COVID-19 and the new health protocols accompanying COVID-19, and with employees working from home rather than in the office, these carefully crafted corporate cultures will be tested, and the style and composition of their office spaces will need to adapt to this new COVID-19 world. The corporate culture will have to adjust to less worker density and fewer meetings and social get-togethers, and those meetings and social get-togethers that do happen will most likely be virtual meetings rather than in person. Consequently, with less in-person social interaction and collaboration, it will be more difficult to attract new, talented employees if the company is asking them to work from their kitchen tables. One of the challenges will be to design and modify existing office space to support a company’s established culture while following the new health protocols and yet still allowing social interaction and collaboration. Office space architects and interior space designers have a big challenge in front of them.
4. A shift from CBD to more suburban properties. Another interesting trend that may be affected by COVID-19 is a shift by office tenants from properties in the central business district (downtown or CBD) to more suburban settings. CBDs have been a destination for tenants for many years. The reasons are numerous and include a central location, a diversified choice of office buildings from which to choose, and, in big cities, mass transit to the CBD which makes it easy for employees to reach the office without the need of a car and parking. However, over the past few years, there has been a trend of some businesses leaving downtown and moving to suburban office space. There are several reasons supporting this trend including avoiding traffic from homes to CBDs, cheaper rent, and, perhaps the most important, a location closer to the homes of the executive team. However, it may be more difficult for employees to travel to suburban office buildings because public transportation to them may not be readily accessible. Now, with COVID-19 and the new health protocols accompanying COVID-19, how many employees are going to be eager to take public transportation (whether a bus, subway or otherwise) to get to work? How do employers feel about asking their employees to potentially risk their health getting to the office downtown? Some of the attractions of leasing space in a CBD (such as not needing a car and limited, but expensive, parking) are now problematic because of COVID-19 and the new health protocols in place due to COVID-19. Do employers now look for office space in smaller suburban office buildings (one to two stories) or in smaller retail shopping centers (presuming there are no zoning issues) with adequate surface parking? Also, in this type of office space, there would be no need to use elevators. The increase in working from home in addition to the new COVID-19 health protocols may accelerate this trend of tenants shifting from leasing office space in the CBD and shift to leasing office space in more suburban settings, closer to many employees’ homes.
5. Co-working. As is well known, co-working has been a major contributor to the US office market recovery over the past five years and has been a major factor in increased nationwide office absorption rates. The bellwether for co-working companies has been WeWork, which some industry experts claim is responsible for 70 percent of the co-working space absorption. Co-working has been popular with a lot of companies because it provides flexibility in addressing their office space needs. A tenant can lease “cool, hip” space for short periods of time (although at a rental premium) to help sort out temporary growth or contraction of its business without needing to enter into long-term lease transactions. Co-working companies typically construct co-working spaces to employ higher densities and include shared space concepts. However, COVID-19 and the new health protocols accompanying COVID-19 will most likely have a material adverse effect on co-working companies for a lot of the same reasons that COVID-19 and the new health protocols accompanying COVID-19 are effecting higher-density office space and open floor plans. Will employees want to share work stations, cubicles and long working tables with strangers and other people who may or may not be contagious with the virus? Additionally, co-working space also has many high touch and high volume areas, which are problematic in this COVID-19 period. Due to COVID-19 and the effects it has had the economy and the office leasing market, the co-working industry appears to have peaked and may be diminishing, at least for the foreseeable future.