Covid’s Short-Term, Long-Term Impact on OfficePosted by: jhon | Posted on: July 2, 2020
With most buildings empty or near empty from coast to coast, office investors put a brave face on the future of the sector—“it’s still alive,” “not going anywhere,” “as soon as there is a vaccine we will be back to normal.”
But underneath, they are nervous. “It better come back because, we have a lot of money in them.” And some tenants are asking for rent concessions and forbearance. This retrenchment is nothing like the ongoing retail debacle, but it’s concerning and will eat into NOI. Long-term leases offer protection, but any pending rollovers are fraught.
In short, the virus is having short-term impacts, which could bleed into long-term ones.
The short-term impacts include rent relief as tenants struggle in a recessionary economy and re-imagining office layouts to provide for social distancing. Most observers are giving up on a V-shape economic recovery, especially as case numbers rebound and the death counts mount again. With office, recessions mean increasing vacancies, tenant subleasing space, shadow vacancy, and a tenant’s market with softening rents and declining property values. The more severe the recession, the more severe the rent losses and value drops.
But this Covid recession adds an unfortunate twist. Many companies realize they can get by and do business without the office. That doesn’t mean that they will give up on office space. Most businesses will continue to want to bring workers together to build team and culture and just to have a place to land, not only for workers, but also clients and customers. Headquarters also make a brand statement too. You don’t want to lose the identity. Operating virtually will never be as real as seeing the glitzy tower with the company name up in lights or even on the building registry.
That said, businesses now realize they can get away with needing less space and reducing their bottom-line expense. They have been cutting down on worker space per capita for decades—reducing private offices, moving to cubicles, then to open environments, including squeezing people onto workbenches. There was some hoteling and more allowance for working from home at least part of the time, but remote working was more at the margins. Now Covid 19 has pushed remote working mainstream. Bosses realize that it works even for them and workers don’t miss the commutes or the commuting expense. And no one wants to force employees back with the health threat looming.
As time has worn on, the remote experience hasn’t worked for everyone. People in cramped residences with roommates or kids out of school need space and seek relief in getting back to an office environment. Some need the discipline of an office structure to get things done.
For now and until a vaccine is available or the virus impacts subside, businesses will need more space for employees who do return to allow for social distancing.
There will be a push and pull, but if companies are meeting objectives, there is no incentive to curtail remote work.
Longer-term office space has become less essential. More people will work outside of the office at least part of the time. Trends reducing space per capita will accelerate. CEOs and their bean counters will reason why spend so much money on office space when we don’t need to. Zoom technologies can bring people together from wherever. Work tracking systems monitor output.
It all means that office is less important and companies will do with less of it.
Then the question becomes what kind of office will be most favored and will location matter?
Once the virus threat is gone, the open space layouts in newer high-tech buildings should be back in high demand. Flexible space for handling a more flexible workforce will be what companies want.
Central locations served by mass transit in 24-hour environments will still maintain a huge edge over satellite suburban locations. Cities that can maintain bright lights-culture-entertainment attractions will be where people will want to congregate when it is safe to get back together.
Suburban office and older, obsolete product look more suspect than ever. And office in secondary cities, removed from global transport networks, is more at risk. And that won’t be good for those cities and their tax base.
Face it. Overall growth in office demand will decline.