WHAT IS THE FUTURE OF OFFICE BUILDINGS?

So many articles coming out stating that companies are now realizing how much more efficient you can be with employees and executives discovering and being forced to use new technologies such as zoom and google meets etc.

If companies are letting employees WFH indefinitely, such as twitter, and we see this trend continue, what is the future of office space demand? Assume many employees are able to WFH and do an effective job.

For example, many of the software and tech companies that took space in a Manhattan office building. A majority of these companies that don’t technically require people to be in a physical office and are now experiencing this due to the pandemic, will people get used to working from home. What about other fields such as law group firms. Wouldn’t they require less space now that most documents are uploaded on the cloud and therefore require less space.

To recap: one takeaway from this pandemic is that there will definitely be less demand for office space. I can’t see how there will be more now that companies are easing up to it. What’s the future for this asset class and all the shops that own this sector of real estate? Bear in mind, we are at record unemployment.

Thoughts? Hope everyone can chime in.

 

Someone on our Global team call today brought up good common sense points that at least I haven’t thought entirely about which are true.

When firms return to the office, they are likely going to have to social distance and/or return starting at 50% capacity. Client visits are likely to be limited as well. So then what’s the point? The whole purpose of being in an office IS to socialize. Have in person meetings with large or small groups, etc. if we can’t even do that, then why force ourselves to adapt once again from what we already have with WFH?

 
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I live in NYC, I am now doing a week in the office and a week WFH on rotation. The office is full of hand sanitizer, extra masks, gloves, bleach pray. When I leave my personal office to grab something from the printer or walk around I have put on my mask.

Even with all that it was really nice to go back into the office and have mask to mask conversations.

Real estate is a social, relationship based business there's always going to be a push for as much in person interaction possible. Yes a lot accountants, AP, AR people can work from home but can you really say you can learn to be a good acquisition or asset management person while not being in the office? This goes for any industry, without in person tutelage its impossible to really understand your company. Companies know this.

On the other end companies are going to need to dedensify, a BB bank has already leased additional space from us with the understanding that pretty much their entire build out they've done over the last couple years is now obsolete ("open office" concept with hoteling and large cafeteria/food services.

Do I know how we get people back into towers in NYC, taking elevators up and down, to and from there on public transit? Not in the slightest. Will I accept a position in the future with a company that doesnt have a full time spot for me in the office? Never.

Yes this will accelerate WFH by years, however COVID's lasting impact on office space will be depend on how long we are in this "new normal"

 

I think office is going to take a hit but ultimately be fine. Class A office space will always lease up, but similar to retail is going to have to adapt its strategy to the new normal.

Many companies who are capable of moving towards a WFH strategy will do so, but I think there are two factors that will result in most companies keeping a strong office presence:

  1. This pandemic is likely to lead to a desire for less cramped office space for better social distancing.
  2. It is impossible to truly replicate the social aspect of an office with WFH, and while we aren't seeing the impact of that as much yet throughout all of this, I think it will take a toll on morale and productivity if this were to continue over the long run. Human's need to socialize, and you can't get your water cooler chats while working from home.

Ultimately, I think many companies will move towards a reduction in office space, but not as much of one as people are panicking to believe. I believe many companies will move towards a rotational work system (i.e. split the company in two, one group works 3 days in the office, 2 from home one week, then switch that allocation between the groups the next week), but also increase the amount of space each employee is given. I believe it will be much rarer than people think to see companies that are truly 100% WFH.

 

Deals "on the margin" will hurt. This is my opinion:

Did you buy a existing property to redevelop into creative office and spend $300-500/sf in CapEx? Well, you're going to get owned by slower lease-up, lower rents, and higher TIs. Is that property in an urban Class-A submarket with strong fundamentals? Okay you'll be fine in the long run... but you better hope you don't face a capital markets issue (i.e. refinancing). Is this asset in an inferior submarket? Good luck sir.

Do you own a suburban office property that could swing from 90 to 70% occupancy when the economy gets tough? You might be okay, but if you're over leveraged, that 7% cap rate you went in at might be a lot riskier.

Do you own a CBD Class A office property for cash flow at moderate or low leverage? You'll be fine.

 

Another fun point I would like to bring up is how only a year or two ago, everyone was going crazy over 'Co-working' companies, and how the future of the office isn't having an assigned desk, but a subscription to a fun open office where you can interact with all sorts of people over shared Kombucha machines.

We basically went from one extreme to the other over what the mainstream office of the 'future' will look like.

 

yup, and because of that is the reason why many landlords are struggling right now. I know the office space in Brooklyn, NY was designed for these - entrepreneurial companies flocked to get space there but now it’s all empty

 

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