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The Office Market After COVID: Will It Be a Zero-Sum Game?

There are three basic scenarios for how office tenants might respond to the pandemic.

With so many employees working remotely right now, will the demand for office space bounce back once the U.S. fully opens for business again? Given the magnetic forces at work that are both repelling and attracting tenants, the office market is caught between favorable and unfavorable outcomes in the short, medium and long term.

It’s possible that it will balance out to a zero-sum game, as an argument can be made either way.

Demand could increase

Demand will be for more office space as many people, thirsty for personal interactions and “water cooler moments,” will want to get back to the office. And, given that social distancing guidelines could remain in place for the foreseeable future, more physical space will be required around employee work areas. Further:

  • Large open, collaborative workspaces may no longer work; instead, these common areas will be reconfigured and reimagined to provide workstations at safe distances to provide barriers from others.
  • Given that employers may need more space to “house” the same number of employees to accommodate social distancing, landlords may be pressed to lower rent per sq. ft., further driving demand for office space in key metro markets like New York, Los Angeles and Chicago. The upside in the mid-term is lower vacancies, which will ultimately result in higher rents.
  • The demand for private offices could also rise as open space design falls out of favor.
  • Developing a corporate culture from afar is challenging, if not impossible. Employees need to be together and interact with each other and with leadership in order to learn and build a company culture that aligns with company values.
  • Certain industries simply need to have employees together in one space, where team members can communicate one-on-one, in-person; consider trading floors and other businesses that thrive on active collaboration. Their employees will come back to the office—and will likely require a larger space to accommodate everyone safely.

Demand could decrease

Offsetting the potential need for more square footage will be the human resource shift we are already seeing: companies that are experiencing success with moving employees to a work-at-home model. These organizations may look to permanently downsize their office space as they now recognize they can actually operate with a large percentage of staff working remotely. They do not need everyone working in one location all the time to be effective, and employees concerned for their health about being around large groups, particularly if they need to use public transportation, will avoid that worry by working at home.

Demand could shift

After 9/11, the New York City office market experienced a shift to the suburbs, which were viewed as safer and less expensive. This trend lasted a few years and ultimately many of these tenants returned to urban offices.

After COVID-19, we could see a resurgence in select suburban office markets for several reasons:

  • Employees typically drive to work rather than use crowded public transportation, which avoids the potential for community spread of disease.
  • The open spaces of suburban office parks are perceived as a healthier environment.
  • Economics could further drive that trend, as rent per square foot is lower. Employers, some of whom may have taken a financial hit during the pandemic, can lease more space for less (and provide for more social distancing).

So, where does that leave all the office players?

In the short term, tenants must determine what their employees will tolerate as they assess their true office space needs. There will be organizations that take on more or differently-configured office space for their teams that long for their postponed in-person dynamic, while others that can easily move to a remote worker model, either completely or partially, will reduce their office space footprint.

The important thing for commercial landlords is to not panic about what the future may or may not bring. Take time now to consider the industries your different tenants represent and how they may need to use office space. Have a conversation with them about how they’ll be bringing back employees with safety in mind, and what they’ll need to accomplish that.

With the new workplace dynamic being wrought by COVID-19, and as owners and occupants size up what’s needed to move forward, the office space occupancy equation could end up being a zero-sum game in a post-pandemic world. The opportunity will lie in rethinking office space to make it more accommodating for employees who are returning to the location, whether that means more or less square footage, reconfigurations to reduce exposure, disinfecting stations, upgrades to the building’s ventilation systems and other measures.

On the landlord side, owners with patience and enough working capital to endure the short-term volatility and initial stress of the post-pandemic lease-up will emerge the winners. They will maintain a strong presence in urban centers, with updated spaces that meet the post-pandemic “new normal” that tenants will seek.

Jahn S. Brodwin serves as senior managing director and co-lead of the strategic and transaction advisory group within the real estate solutions industry practice at FTI Consulting, Inc. in New York. He can be reached at [email protected]. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

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