What lasting effects will the 2020 pandemic have on the office space environment? Will companies begin the process of downsizing from traditional space needs in favor of the conveniences of having most employees work from home?
Among the many topics of conversation that I have had with peers and clients over the course of the last few months has been that of the future of traditional office space. Many have asked if I think that this pandemic has granted a “get out of the office for good” card, and they wonder if businesses will ever go back to the typical 100 to 150 square feet per employee model that many office tenants strive for, when seeking new office space.
Others have wondered, as have I, if there will soon be a deluge of sublease offerings from businesses that no longer need the amount of square footage they signed up for before COVID-19 policies required that a vast number of businesses have their employees work from home.
With these questions, much of my time is spent listening as the business leaders share with me their thoughts on how they see the future of their business needs reforming as a result of the contagion.
Here are the quick answers that I have gleaned for my conversations and research:
Question: Will the massive shift to work remotely become a more permanent part of business culture in the 2020’s?
Answer: Yes, but not to the degree the market is experiencing, as we are still in the throes of the pandemic.
Question: As businesses rethink their workspace environments, will there be a trend toward downsizing that could create a subleasing shadow market that drives down lease rates as happened because of the 2008 recession?
Answer: Simply stated – NO.
So, what are businesses doing right now that could start a trend to change office space as we have known it over the last decade?
Let’s face it, whether one accepts the concept of social distancing, wearing a mask, staying in place and the definition of essential businesses, COVID-19 is real and very likely here to stay for the foreseeable future. Most Americans have accepted that such measures, to varying degrees, is what we all must do to keep the contagion in check. With the recent spikes in southern and western states, it is clear that some of the relaxation of these measures were, at least in part, the cause.
What do I mean by the foreseeable future? Well, while our government and the rest of the world is working hard, at all levels, to create a vaccine, the idea of expecting a vaccine that will inoculate a global population of 7.8 billion within the next 12 to 18 months is very unlikely. So, face it, we are talking years before the world is comfortable getting back to normal. But wait … then there is the potential of COVID mutations.
Clearly, treatments for the disease have improved dramatically. Hey, even my wife’s 90-year-old aunt recently recuperated quickly from her bout with COVID-19!
Market Shifts Redefine Winners and Losers
In the meantime, the economy throughout the world is anxious to get back to work. Here in the USA, after an initial collapse that scared the bejesus out of many, there have been a sputtering of encouraging surges that have infused hope that the COVID-19 recession will be short lived.
But how will businesses operate, in this new environment?
What will be the New Normal?
The nature of a successful business is to rapidly adapt to conditions that impact their specific markets. During this pandemic, nearly all businesses have worked hard to figure out what they must do to adjust.
For many, all it took was the immediate impact of COVID-19 to push them over the edge. Consider several retailers like Macy’s, Victoria’s Secret and Nordstrom’s, all of which had been struggling from the steady threat of the growth in e-commerce. With a push from the forced change in shopping patterns, it seems that declaring bankruptcy was the only answer.
On the other side of the same coin, other businesses have exploded with success because of the pandemical market shift. Look at e-commerce, pharmaceuticals, logistics and delivery services, video conferencing and the streaming of entertainment and gaming.
Defining the “New Normal” for Business
While all this is taking place, all businesses have looked at how to adapt. And many are looking at changes in protocols that will likely be much more than a temporary change in company culture.
Here are a few points on how the “New Normal” appears to be shaping up:
Expansion of Working Remotely
Business leaders have now had an opportunity to experience the concept of how well many of their employees work from home. With certain types of individuals, performance has been shown to be very positive, but with others … not so much. They have learned that many disciplined introverts charged with keyboard tasks have performed well, while others who crave person to person engagement and those who are prone to distractions have failed in holding up to what is expected of them. To that end, managers now know that certain individuals and skill sets are very capable of working remotely, while other personality types and expected tasks need to be in a more structured environment.
Bottom line: The concept of working remotely will expand beyond pre-COVID-19 times, but not to the extent of what current COVID-19 guidelines have been requiring.
Adopting and Adapting to Social Distancing in the Workplace
This one was initially less obvious to me. It is very likely that in conjunction with establishing new policies for working remotely, the physical space demands of many businesses will expand, versus what many thought would be a contraction.
Consider that many businesses will seek to expand the amount of square footage they traditionally relied upon. New physical distancing guidelines will drive a push toward more private offices, wider corridors and expanded space for workstations and cubicles. In addition, many businesses will adopt policies of expanding the workday and put shift work schedules in place. The typical close proximity of persons in conference rooms and collaboration areas will have to be reconfigured.
Bottom line: While many TAMI (technology, advertising, marketing and information) firms may have a greater shift toward working remotely, on a grander scale, there will likely be no mega surge in a shadow market of sublet offerings, as experienced during the 2008 recession. However, in several cities around the country where TAMI firms are heavily concentrated, municipalities, such as Atlanta and Boston, have already experienced significant increases in sublease offerings.
Pressures on Landlords
While tenants will be making capital improvements to their leased space, the long-term effects of the pandemic will likely put pressure on landlords to adapt to the changes in the workplace environment.
Consider the impact of social distancing in elevators – no longer will people willingly pack themselves in an elevator cab like sardines. With the six-foot social distancing guidelines, think about how many will fit in a typical office building elevator! Holy crap, how long of a wait will one have to get to the office on the second or 5th floor, when they arrive at in the building at 8:55 AM?!
In addition, landlords can expect heighten interest in air filtration, a greater level of janitorial services and changes in spacing of urinals and toilets in common restroom facilities. And what about possible lease clause demands from tenants who seek abatement of rent, in the event of a future pandemic?
Bottom line: If landlords want to attract tenants going forward, many will likely have to expect new and costly demands and concessions to attract and retain tenants.
Is this really the future?
Will all of this happen has outlined above? Likely not, but what is clear is that significant changes are already in the works. Change for most is very uncomfortable. Most do not like to adapt quickly, unless their life depends upon it. In the case of COVID-19, most Americans and residents of the world have made the shift out of fear, believing that their lives DID depend on it.
There is no question that the commercial real estate market has been impacted dramatically across the spectrum of its many sectors, and in some cases, the changes that have come about from the COVID-19 pandemic were nothing more than accelerated from an eventuality. But with others, there were new and unexpected changes offering new challenges and opportunities.
Going forward, many individuals and businesses will remember this time well into the future and put permanent changes in their policies and culture, while others will take the risk of doing little to nothing.
One can only guess, as to how all this will play out!
What is happening in your business?
Rocky Mackintosh, President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland, has been an active member of the Frederick community for over four decades. He has served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012. He currently serves as chairman of the board of Frederick Mutual Insurance Company. Established in 1843, it is one of the longest enduring businesses in Frederick County.