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On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global pandemic. Since then, the majority of U.S. office workers have transitioned to working from home in order to maintain social distancing and adhere to stay-at-home orders.
But once restrictions loosen and we begin to return to the office — likely in waves — one question on everyone’s mind is “What will the office look like post-pandemic?” The combination of the pandemic and our national home office experiment will almost certainly have ongoing ramifications over the next few years. So what trends could the commercial real estate industry see as we all navigate our new normal?
Here’s what I suspect the future has in store:
Evolving Use Demands With Mixed Results
Over the last 10 years, companies have been allocating fewer square feet to each employee, decreasing from 211.4 square feet in 2009 to 193.8 square feet at the end of 2017, with some of the most densely populated open office settings I’ve seen reaching as low as 125 square feet per employee.
When we return to the office, I believe there will be a renewed importance placed on personal space and less desire for large common areas. After all, almost every office surface is a shared surface, and people are not going to feel comfortable squeezing into a small conference room or lining up six in a row on a high-top. And I don’t think this sentiment will dissipate quickly. With more space per employee as the primary driver, we could ultimately see an increase in office space demand.
However, counterbalancing this future demand for more space is the fact that, with the majority of traditional office jobs currently working remotely, some jobs could stay remote. Morgan Stanley CEO James Gorman told Bloomberg Television, “Clearly, we’ve figured out how to operate with much less real estate. Can I see a future where part of every week, certainly part of every month, for a lot of our employees will be at home? Absolutely.” A recent Gartner survey of chief financial officers found that nearly three-quarters of CFOs and other finance executives expect they will move at least 5% of their on-site workforce to work-from-home after the pandemic.
The end result? It’s mixed, but ultimately, I think net demand for office space across the U.S. will grow over time. However, this growth scenario depends on businesses shifting a portion of their offices to cheaper locations. This leads me to the next trend.
A Mild Resurgence In Suburban Office
As I mentioned earlier, I believe employees are going to demand more space, meaning space could become an amenity that companies use to compete for talent, while other formerly important social amenities take a back seat.
The problem with more office space in downtown nodes is that it is expensive. So rather than requiring everyone to work in an office in Manhattan, why not allow a percentage of your team to work in offices in Yonkers, Hoboken or Westchester? In a post-COVID world, I think we’re going to see a resurgence of demand for suburban office space. The suburban office offers cheaper rent per square foot and an easier commute for your employees. People won’t have to ride crowded public transit, navigate packed city sidewalks or fight rush-hour traffic to get home. Plus, inner suburbs are continuing to grow into live-work-play neighborhoods in their own right, making them more desirable locations overall.
The Future Of Coworking
And finally, what will happen to coworking spaces?
Although people might be nervous about shared workspaces, I think coworking will be fine in the long run. There was a movement for a reason, and chief among those reasons is small tenants want better options than what was historically offered directly by landlords. But you need to get the business model right.
To me, an office building is like an ecosystem. When it is vibrant, you attract a small tenant to your building on a lower floor, move them throughout your building as the company grows until, one day, they become an anchor tenant. Let’s examine two different coworking models:
I had suspected that WeWork would not perform well in a down environment given their business model — taking long-term obligations and spreading them out across short-term tenants. But I think groups operating like Industrious could survive and thrive in a post-COVID world.
Industrious primarily manages space under profit-sharing arrangements with landlords. Landlords want to attract smaller tenants to lease-up the bottom floors of a building, which is often the hardest to lease and, ergo, the cheapest. If a company is managing that part of the building with its specialized build-out, landlords are making a small tenant specialist responsible for that less desirable floor and empowering them to maximize revenue. As coworking tenants grow, they can easily move from the coworking space into a larger, dedicated office upstairs. The management model even offers the flexibility for landlords to offer those upsizing tenants the ability to maintain access to some of the coworking amenities. There’s no conflict.
Conversely, WeWork’s business model is a closed system. As tenants grow, that often leads to moving them to a different WeWork location in the submarket. As a landlord, if all you ever receive from your coworking tenant is rent for that floor, you never capture the ability to grow a 500-square-foot tenant into a 100,000-square-foot tenant. The ability to attract and grow small tenants into large tenants is paramount to preserving the ecosystem of an office building.
Business As Not Usual
While we are all eager to return to our offices and reunite with our friends and colleagues, there is little doubt that the office we return to will not be, and may never again be, the office we left in March. However, if we honestly examine the shortfalls of our previous office environments, embrace the innovative solutions that will undoubtedly be made available and listen to our employees as we redesign our spaces, we can emerge from the pandemic with a happier and more productive workplace.