Here’s a prediction that is a sure thing. You will soon be seeing articles of all types discussing the pandemic‘s impact on anything and everything one year on. So let me start early and beat the crowd instead of following it by discussing the effect of the Coronavirus on our area of expertise – the office. This topic actually has important implications for our cities and business as a whole, as I will explain in this note. Suffice it to say that the office has changed forever, and maybe our cities as well. Below are six (6) things we have learned.
1.) There has been a lot of chatter lately about what the new,”hybrid” office is going to look like. However, all of the commentary is speculation until a substantial percentage of employees have received their shots which is months away. Companies are hoping that they don’t have to make major renovations to their office configuration because if it is safe, they can leave the open plans in place. So far as we can tell, the only changes we have seen thus far is that there is a lot more sanitizer available and cleaning is more rigorous. That hasn’t brought office denizens back as there has consistently been a less than 15% tenant occupancy rate in New York City for many months.
There is a threshold issue here – until a critical mass of employees are vaccinated, there is not going to be a meaningful return to the office. But after that happens there will be a major psychological shift, and many will want to return to the office. At that time, the next phase of office life can finally begin.
2.) I have extensively canvassed our clients regarding their plans for returning to the office after they feel safe. There has been a wide range of responses, which has led me to conclude that the policy of every tenant is going to be sui generis. These reactions run the gamut from a complete return to the office at the earliest opportunity to a total continuation of remote work.
On one end of the spectrum, the CEO’s of some companies can’t wait to get back to the office. They miss the ease of communicating with colleagues, benefits to the company culture and the positive results that come from a creative exchange of ideas in person. In contrast, others never want to face a long commute on a crowded train or in slow-moving traffic again. Some employees can’t wait to get out of the house to see their friends at work or get away from their spouses, partners and kids. Others have greatly appreciated the additional time at home which they desperately needed to take care of parents or young children, or just like working alone. We have seen a lot of mixed signals from companies on this issue recently. For example, LVMH / Tiffany just asked their employees to return to the office but Spotify announced they can work from home for an indefinite period.
In the middle are many businesses that are considering a hybrid return. Their management wants to return to the office and understands that the office helps knit a company together, but also recognizes that a majority of employees prefer to work at home for at least part of the time due to family needs or personal preference, and therefore only will ask employees to come in a few days a week. This will require companies and landlords to develop creative responses in workplace design with emphasis on common spaces for meetings and desk-sharing by two or more employees.
3.) We have also learned from a year of experience that from the perspective of tenants, the great workaround actually worked remarkably well under the difficult circumstances.
As a corollary, it is important to stress that many of the businesses which are office tenants are going through a period of profound uncertainty. For example, if they are in the travel, entertainment, retail or restaurant/hospitality industries, they have been decimated by the coronavirus. Unless they are digital businesses, at best their business plans are highly uncertain. At worst they are on the verge of bankruptcy. Understandably, many of the businesses I speak with are putting off decision-making as long as possible so that they can become comfortable with a period of consistent results to know what they can spend on real estate. Even some successful businesses that haven’t missed a beat are understandably taking a wait and see attitude.
The bottom line is that one size does not fit all. As a result, I predict that there will be a return to the office when the health situation improves, but the pace of the return will be irregular and the nature of office life will change. Back in the day, there was a widely accepted belief in business that most employees should be in the office for a minimum of eight hours a day, five days a week, and for a lot more time in the most demanding jobs. However, that view was already changing before the pandemic.
In order to attract the best employees, companies are going to have to offer flexibility of working location for at least part of the time. Yes, those employees who want to get ahead will want face time in the office to stay in front of the boss or move up, but that is not necessary for everyone if personal contact is not essential to their job. On the other hand, a major fintech CEO and major media CEO both recently told me separately that they do not see how a business can grow absent in-person apprenticeship which simply cannot be done remotely.
4.) So what does this mean for the office market? Tenants have multiple options for the first time and landlords will need to work harder for their business. That can potentially be achieved by offering significantly lower rents, more free rent and tenant improvement budgets, flexible lease terms, cancellation rights and pandemic protection. It will not be achieved with hand sanitizer, signage and social distancing alone.
The bargaining leverage is now with the tenants. Government policy can help with tax credits for business rents in affected areas and extended government reimbursement for office rents well beyond the two month PPP payments. We are facing an existential threat to our major cities and half-measures will not get the job done. After we are safe again, people will definitely want to live in cities as they have since the beginning of time due to their many advantages which we do not need to enumerate here. However, companies will have to be induced to return to work in those cities.
5.) What ultimately happens in the office space market depends on how landlords react to what may be a major cultural shift borne out of necessity. Office-based businesses adapted incredibly well to having their workplaces shuttered on a moment’s notice. As a result, we should not expect those businesses which demonstrated such extraordinary flexibility while paying the rent for empty offices to go back to doing business the old way. Rather, it is up to the real estate community to demonstrate to those businesses why they should return to the office. It’s time for landlords to get creative – they need to bring the customers back into the store which is going to require both bargain prices and innovation if they want to achieve that goal.
6.) Despite all of the problems of the last year, for those who enjoy office life and want it to continue there has never been a better opportunity to lock in long-term values. Of equal importance from a civic standpoint, New York City’s future prosperity depends upon the return of its millions of office workers.
So that’s the way I see it. As always, we welcome any comments from our clients and friends. And if you are facing any real estate issues, please feel free to tap our expertise.
Thank you,
Ruth Colp-Haber
