11.18.21 | Industry Insights
Does a return to the workplace in the post-COVID America herald a return to normal or the start of a new era in commercial real estate?
While it is true that the COVID-19 pandemic upended our daily routines and forced a nationwide rethinking of what it means to “go to the office” changes in the workplace were already afoot by the spring of 2020. One big change that was already well underway was the trend toward co-working.
By the end of 2018, the co-working giant We Work had grown to 220,000 members in just eight years, with offices in 73 cities. And just over a year before COVID hit, a study by the Global Coworking Conference released in June 2019 found that an estimated 754,000 workers were utilizing co-working spaces across the US. Another study by the real estate services firm Jones Lang LaSalle found that during the past decade co-working spaces had grown at an average of 23 percent per year.
Workers’ desires for workspace flexibility and high-end amenities, particularly among Millennials workers who were just entering the workforce, were changing the way business gets done long before COVID. What commercial real estate analysts are now finding is that COVID has reinforced these existing trends towards co-working and greater workplace flexibility. This might affect how companies are approaching long-term leases, as 10 to 15 year leases on tens of thousands of square feet of office space might not leave any room for adaptation.
How is the reimagined post-COVID workspace shaping up? For one thing, workspaces are likely to be placed at bigger intervals, the days of dense floor-plans like those on trading floors of major banks and newsrooms are now a thing of the past. Many studies such as those released by McKinsey and Co. and Microsoft suggest that hybrid work – where some employees work from home while others work from the office – is what the future holds. A mixed regime of working from home and office seems to be the preference of a wide plurality of American workers. A poll commissioned by Prudential and conducted by Morning Consult found that 87% of American workers polled would prefer to continue working remotely at least one day a week.
In a post COVID world, the question employers and commercial landlords alike are asking themselves is how to create an office environment that will make workers want to return to the office?
In order to stay competitive in an environment where the demand for long-term leases has shrunk, commercial landlords have begun to incorporate co-working space into their space planning, while also striving to provide high touch amenities to keep pace with the competition. Management companies are expanding their role from traditional property maintenance (i.e., janitorial, security, HVAC and elevator upkeep) to focusing on the overall user experience which very much includes a focus on post-COVID health and safety protocols. Providing niche benefits and amenities also remains at the forefront in order to attract the co-working generation. Several studies including one by JLL have also cited a “flight to quality” for prospective office tenants who are no doubt increasingly influenced by the competitive market for new hires in many industries.
On a macro-level what does all this mean for the commercial real estate market in a post-COVID environment? Real estate executive William C. Rudin told the New York Times in April that he saw “signs that people are coming back, and it’s a tenant’s market.”
Several months later, it remains a tenant’s market. As of the end of the 3rd quarter 2021, there was approximately 77 million square feet of commercial office real estate available on the Manhattan market alone. In the aftermath of the pandemic, property holders who are looking to sell or lease office space are operating in a changed landscape where potential tenants are seeking workspaces that meet the requirements of a post-COVID world with its emphasis on flexibility and health and safety measures.
Many companies have delayed their planned return to work date to the 1st or even 2nd quarter 2022. This was largely attributable to new factors which came into play in the past few months including the emergence of the Delta variant of the coronavirus, changing requirements of mask mandates and new booster shot protocols.
Yet for all that, some investors are signaling that they are bullish on a return of normal in corporate America. For much of the past year, one of the world’s largest asset managers, PIMCO, has been expanding its commercial real estate portfolio throughout the US, including in Manhattan where it recently acquired the old New York Times headquarters as well as the 20 story office tower at 315 Park Avenue South. The Wall Street Journal reports that between January 2020 and June 2021 PIMCO has acquitted $12 billion in private commercial property.
Meantime, tech giant Google has likewise shown it too is bullish on commercial office space in Manhattan, announcing plans to purchase the $2.1 billion St. John’s Terminal on the West Side. With this acquisition, Google will, by the end of 2023, have over 3.1 million square feet of office space in New York City. It expects workers to return full-time to the office by January 2022. Google CEO said the purchase shows the company’s commitment to in-person work, noting that “…being together, having that sense of community, is super important for whenever you have to solve hard problems, you have to create something new.”