Real Estate Trends For a Post-COVID World

D CEO Magazine (September 1, 2020) – At the moment, nobody knows which of the changes to office use brought about by the pandemic will be permanent, but generally speaking, everyone resists change, especially sudden change.

But this time, we did not get a vote. Friday rolled around, and we were told to grab-your-stuff and go home. We didn’t know when we would be back.

Perhaps we could return to the old ways, but never underestimate the influence of habit formation. One shoe bomber forever changed the way we get through airport security—and we adapted.

However, you can tell that people are becoming quarantine fatigued and that this is not going to be sustainable. Isolation brings its challenges —the loss of daily face-to-face time is a real challenge for companies and employees. We’re social creatures by nature, so isolation is leading to a greater appreciation for office settings. Plus, we are discovering some significant issues:

  • Virtual training is more challenging—hiring and integrating new employees is more complicated.
  • Employers fear that younger professionals aren’t developing at the same rate as they would in offices, sitting next to colleagues, and absorbing how they do their jobs.
  • No CEO should be surprised that the early productivity gains companies from early remote work will peak and level off.

Over the past 10 years, companies leased expensive, long-term, and inflexible leases in cool trendy workplaces. This was justified because there was a war for talent, and these trendy spaces would help secure top talent while improving a company’s image, so tenants agreed to pay landlords’ increasingly soaring rental rates.

However, COVID has resulted in massive uncertainty around future corporate revenue, which is going to result in

restricted spending and trigger austerity for companies. Tenants will be looking for more value office space. One result may be millions of square feet of Class A office space becoming available as businesses shrink their footprints. As sublease space and new construction come onto the market in the upcoming months, vacancy could rise to 15-18 percent in top office markets.

The previous belief that a well-located office building full of highly paid workers in or near a dense, expensive city is the best way to operate a successful firm has been challenged by COVID and the reluctant acceptance of remote working.

Most companies and employees are embracing flexible working policies, and companies recognize that some workers can successfully operate at least part of the time remotely.  As we advance, companies will likely allow employees more flexibility to work remotely; however, savings in square footage could be offset by the need for greater space for social distancing.

But companies are recognizing that working from home does not work for all employees. Teambuilding and productivity are still unmeasured, especially for businesses with a long sales cycle, such as real estate. Most companies have not tried hiring and building teams from scratch online and are learning that employees need more face-to-face contact to make these teams.

According to several employee surveys, only about 50 percent of employees feel connected to their colleagues during the remote work period. Remote collaboration seems to work best for task-oriented work but doesn’t offer the same opportunities for informal learning and mentoring:

  • Salespeople who were previously office-based are struggling the most because they are unable to feed off face-to-face interaction.
  • Research and development teams are finding that the lack of face-to-face interaction reduces brainstorming and collaboration.
  • Operations and support personnel appear to have little downside in their experience.
  • Millennials want flexible work options, but the majority are finding challenges in working from home. Many are juggling working remotely with childcare and other responsibilities.
  • Gen Zs (employees under 24) often have an inadequate home workspace.

So, what does this mean for the future of real estate in a Post-COVID world?  Here are a few likely results:

  1. The office market will be moving from landlord driven to tenant driven. Markets will heavily favor tenants in the next three to five years due to excess space as a result of remote working. Right now, businesses have about 30-50 percent more space than they need. The best way to hedge against this is to develop a new business plan based upon projected conditions and new revenue opportunities, securing new spaces at discounted rates over the next four to six months.
  2. A flight from Urban Centers. A May 2020 Harris Poll said nearly 40 percent of urbanites intend to flee urban centers for less dense areas and suburbs. Many are predicting a move by workers away from expensive gateway cities toward relatively less costly cities in the Sun Belt. DFW, Raleigh, Denver, Charlotte, Austin, and Phoenix are cities likely to benefit from an in-migration of workers no longer tied to Tier 1 cities because of their job.
  3. Rent will drop. Once the Great Lockdown ends, tenants are not going to give up all of their office space suddenly; however, companies are going to allow remote work to continue and will need office space with reduced square footage.
  4. Industrial Real Estate will be the big winner. Last-mile logistics is the critical need of the online retail market, which has done nothing but expand since the end of the recession. Increasingly faster delivery will drive up demand for industrial in last-mile areas.
  5. Flexibility will be the future. Don’t underestimate the influence of habit formation. The current WFH and reduced occupancy levels will become habit forming, but there will NOT be one answer that fits all. Flexible, customized solutions for different businesses/industries will be critical.

Susan Arledge is President of Site Selection and Incentives at ESRP Real Estate.