Without a doubt, Covid-19 has affected the way in which organizations view and treat their leased real estate assets. There has been a drastic shift in how we live and work. Recognizing the absolute potential for another life-altering event, companies must be proactive in anticipation of their business’ future needs.
Since March 2020, there has been no shortage of opinions and strategies in the commercial real estate industry with regard to the space needs of enterprise entities. A new lexicon of terminology has emerged. Terms such as "future of work", "nearshoring", "hub and spoke", "hub and gateway", and "remote work" are now part of our vernacular. When boiled down, the issue is thus: my organization needs an office, but where should it be located in order to best serve the needs and wants of my company and employees? This is not a glib reflection on the state of the commercial office market, but represents a monumental shift in the perception of those who make real estate decisions for such organizations.
“Terms such as "future of work", "nearshoring", "hub and spoke", "hub and gateway", and "remote work" are now part of our vernacular.”
Traditionally, companies large and small would gravitate to urban centers. The idea was that people wanted to live or be near major cities. In turn, this created a need for newer, flashier, modern offices to attract and retain talent as well as clients.
Amazing how that has changed in under a year. In most major cities, employees are prevented or at least discouraged from coming into the office. In just a short time, people have adjusted well to working remotely, being home / close to their children who are likely learning virtually, and have lost the appetite for long and arduous commutes. Without getting into the statistics, it should come as no surprise that the urban sublease market has exploded over the last year, and major multinational corporations have started to announce a reduction in their leased office space and a global shift to a smaller footprint going forward.
Nevertheless, employees need a space to collaborate, meet with clients, secure work product, get mentoring, and take initiative. In truth, I see the end user of the office – the employee – being the driving force behind real estate decisions.
“It should come as no surprise that the urban sublease market has exploded over the last year, and major multinational corporations have started to announce a reduction in their leased office space and a global shift to a smaller footprint.”
Most mid-level and upper management live outside the city. Additionally, cities like New York have become exceedingly expensive for young people, driving them to live in outskirt areas or even back at home with their parents. In this respect, the suburban downtown office presents the best option for both employers and employees.
In a suburban downtown setting, employers find a cost effective and right-sized option for the various employees who need a convenient and welcoming place to meet and be productive. Suburban downtown office does not necessarily mean small. On average, due to off street parking regulations, occupancy for a typical suburban office will accommodate one person for every 250 square feet. When not limited by the need to provide for on-site parking, occupancy can be increased to mimic urban office standards of 150-200 square feet per person. Another misconception is that there is a shortage of big blocks of space available in suburban locations. While spaces to accommodate 10-20 people are more common, there are plenty of larger spaces available that can accommodate up to 200 people or more.
In these times, space needs and efficiency are also better achieved in the suburban downtown office building, which can meet personal space requirements quite easily. Employee attendance can be better staggered and scheduled, and with most buildings being at most five or six stories high, getting people physically into the office does not require as much time as would otherwise be needed (e.g., waiting for elevators that can only be used in limited capacity).
Most suburban downtowns also provide a work/life atmosphere that attracts and retains talent. The cost of living is usually more affordable in the suburbs, and gone are the daily hour-plus commutes in each direction.
From an owner’s perspective, there has been a general acceptance of shorter lease durations and more flexibility. Traditionally, office lease terms have been around seven to 10 years. In recent years (pre-pandemic), these have been trending shorter, to five to seven years. With the only certainty being uncertainty, leases have now been trending to the three to five year range. Of course, a longer lease term favors both the landlord and the tenant, but in these times a fair deal is appreciated on both sides of the table.
“Leases have now been trending to the three to five year range.”
No one knows when Covid-19 restrictions will end. What I believe we can all say for certain is that our collective perceptions have forever been changed, and the decision-making process of organizations with regard to their office requirements cannot go back to the way it was before.
I see great potential for all stakeholders, landlords and tenants, in the office rental market. Owners find worthy tenants for their buildings, and tenants enjoy a greater tenant experience, increase employee productivity and accessibility, save costs, and can take advantage of space efficiencies. I am and remain an optimist and welcome this change.
Michael Nachtome, COO of Murray Construction Co., Inc.
Murray Construction Co., Inc. is a developer of Office and Industrial Properties in New Jersey and the greater NYC metro area