The NAIOP Research Foundation held its National Research Directors Meeting in September during CRE.Converge in Miami Beach. The conversation, facilitated by Jennifer LeFurgy, Ph.D, NAIOP’s vice president for knowledge and research, brought together some of NAIOP’s Distinguished Fellows and research directors from national real estate brokerage, data and investment firms. It focused on the near-term and long-term outlook for the office sector.
The panelists largely agreed that the much-hyped population shifts that occurred during the COVID-19 pandemic were less impactful than many believed.
Will McIntosh, global head of research for USAA Real Estate, said his company used moving-van data from United Van Lines and change-of-address information from the U.S. Postal Service to determine population movement trends. He said they learned that the predominant pandemic trend was intra-market migration from central business districts out to the suburbs.
“This was a little bit counterintuitive, because a lot of people think there’s this mass exodus that’s occurring, for example, out of California, when in fact net outmigration trends for California remained relatively consistent the last several years,” he said.
Glenn Mueller, a professor at the University of Denver’s Franklin L. Burns School of Real Estate and Construction Management, said the data he’s seen indicates that occupancy for suburban office has grown stronger than central business districts for the first time in history.
“Do you think that’s because a lot of people started moving out of downtowns first, and then wanted the offices closer to where they lived, or was it firms wanting to spread people out more and taking advantage of the less expensive suburban spaces?” he asked.
McIntosh said he believed it was probably a mix of both, though workers didn’t want to commute downtown using public transit at the height of the pandemic.
However, Matt Dolly, research director with Transwestern, noted that people were moving out to the suburbs before the pandemic.
“The largest part of the workforce is millennials, and the older millennials are starting to raise families. It can be difficult to raise kids in apartments,” he said. “We saw some of that shift in New Jersey. Everyone was moving downtown for years before that started to happen.”
Scott Homa, director of U.S. office research at JLL, said he didn’t think the rhetoric of a pandemic-fueled suburban boom matched the reality.
“We saw tour activity and office occupancy higher in the suburbs compared to downtown during the height of the pandemic, which makes sense, because employees are able to avoid mass transit,” he said. “Coworking spaces have also seen stronger demand and more use in the suburbs than downtown. But I remain a skeptic on the suburbs longer term, because if you can work remotely and you have the cities, which are your central gathering places, then what’s the point of having space in the suburbs that’s not accessible to the entire workforce?”
However, Julie Whelan, head of occupier research for the Americas at CBRE, said certain suburban markets will continue to do well if they can offer experiences similar to urban cores.
“I think it’s important to define what a suburb is,” she said. “While they were less affected by the pandemic, structural vacancy is still higher in the suburbs, and it will continue to be. But way before the pandemic, CBRE did a study of suburbs that are more focused on live/work/play. These are suburbs that mimic cities in terms of density and walkability. Even at that time, they were outperforming some of the downtown markets. I think that will continue.”
Next, the panel discussed what a full return to the office might look like. They all agreed that workers will be spending less time in the office, so it will be critical for companies to make that time richer and more meaningful.
“It’s about the hybrid nature that the future holds,” Whelan said. “Work is not a binary choice. Every company is going to have to look at who their workforce is, what motivates them and how that aligns with organizational objectives.”
Whelan added that office conditions could vary greatly depending on where they’re located.
“In Austin, the prevalence of remote work is very high, but the job growth in Austin has been extreme, and the office market has been a beneficiary of that growth,” she said. “It’s not like you get the expense of the office market, because there’s more remote work. If there weren’t more remote work, imagine how Austin could have been. The office market is changing, not disappearing, because of this new dynamic.”
According to the U.S. Census, by 2019, about 10% of Austin’s workforce had full-time virtual schedules, the No. 1 city in the country for that metric.
Whelan said unassigned seating coupled with utilization sensors that help companies understand who is in the office and how it is being used will help them better plan for space requirements.
“Many companies are starting off with a three by two,” she said. “Employees are expected to come into the office three days a week, and depending on your team, you may have one or two days where everybody must come in the same day. The other one can be floating. That’s going to help provide a more even distribution of people in the office. Then if you layer a scheduling tool on top of it, that could really drive efficiency.”
“Making the experience at work just as good as the experience working at home is critical,” Whelan said, adding that CBRE has been rolling out its Workplace 360 initiative at its corporate offices. Developed after several years of research that began long before COVID-19 struck, Workplace 360 “reimagines CBRE workspaces to promote flexibility, mobility and productivity through technology-enabled, free-address and reduced paper offices,” according to the company.
Whelan said these new offices are based on activity-based workplace design principles.
“Think fewer dedicated seats in offices and more shared space, collaboration zones and social areas,” she said. “It’s all guided by a strong technology backbone. As someone who travels to a lot of different offices, no matter where I am, I feel like I’m a member of CBRE and I can engage with their technology and office just like I would if I were in my home office in Boston.”
Workplace 360’s focus on technology and collaboration reflects an important trend for the future success of office properties.
“People are going to spend less time in the office,” Whelan said. “Before the pandemic, people were spending around 4.4 days a week in the office. We think that post-pandemic, it’s going to be around 3.3 days a week. That’s about a 24% reduction.”
But that doesn’t mean offices will require 24% less space.
“First, it’s important to think about how often people come into the space,” she said. “It is going to be very difficult to do a ‘spread the peanut butter’ approach to people coming into the office evenly Monday through Friday, so companies are going to have to plan for peak occupancy. Secondly, design principles are going to be different depending on the configurations before the pandemic. More space will be needed. Not for social distancing, which will go away, but more social space, more collaboration space, the ability to pick where you want to work and not have to be relegated to a private office.”
Whelan said CBRE research indicates that on average there will be about 9% less space needed per new office worker.
“But we don’t think that means we’re going to be in a less occupied state once we’re recovered,” she said. “We likely still have the right amount of space in the market, but the nuance is we may not have the right type.”
Mueller said the commercial real estate industry needs to come up with a formula for the number of square feet per person if workplaces have hybrid schedules.
“The growth of employment in our country is going to be largely office-using jobs,” he said. “Downtown office development has become a lot harder and takes a lot longer, typically about five years. We had a lot of space come online in 2020. Markets like Boston are oversupplied. They’ve got 20% demand growth, but 30% supply growth.”
McIntosh said he’s concerned that the cost to upgrade less desirable office space could far exceed the benefit.
“I look at some of the office buildings out there and I think ‘these things aren’t going to survive,’” he said. “It reminds me of a lot of the retail out there. It’s not oversupplied, it’s under-demolished.”
Whelan agreed. She believes that structural vacancies at certain tranches of the market will be persistently higher than before the pandemic.
“I read a recent article that said you’d have to trade those assets at around 50 cents on the dollar to even think about a reuse for it, whether that would be multifamily or other property types,” she said.
The panel then discussed how generational differences will impact the return to the office.
“There’s a lot at play here,” Whelan said. “To get to full employment in a market where it’s hard to find people right now, it’s crucial to let people work in alternative ways. Companies must broaden their horizons and look at the needs of their current and future employees.”
Whelan said research indicates that younger workers are the group most eager to return to the office.
“They want the knowledge exchange with the senior people,” she said. “A lot of times, the office is their social anchor. It’s where they’re making friends when they move to the city.”
Other generations have wants and needs specific to their life stage. For example, there’s the sandwich generation, who are adults “sandwiched” between dealing with aging parents and young children.
“They’re in mid-career and they have the network they need to get their work done,” Whelan said. “They’re going to be the ones who will really value that flexibility.”
For those near the end of their careers, opinions on workplace flexibility are more mixed.
“Some say they want to be in the office more,” Whelan said. “Others say they’ve found a newfound freedom and new interests during the pandemic, and they don’t want to be as tied to the office. For the large number of people who will be retiring in the next decade, the idea of not coming in every day maybe allows for a smoother transition. They can stay on longer to transfer their knowledge to the younger generation.”
Homa wondered whether many of these workplace changes are temporary.
“You have the needs and wants of the employees, and you have the needs and wants of the business, which sometimes are antithetical,” he said. “There’s a cloak of legitimacy behind working from home right now due to the pandemic, but even more important than productivity is innovation and growth, which is hard to accomplish when the workforce is highly dispersed.”
Homa said that’s why megacap tech companies like Google, Amazon and Facebook have been building huge campuses filled with amenities to keep people there for long hours each day.
“There’s been almost 10 million square feet of tech expansion during the pandemic, but at the same time, they keep saying that their workers don’t have to come back to the office — employers can’t be more heavy-handed in demanding that employees report to the office because it’s such a tight labor market,” Homa said.
McIntosh said his company’s leadership wants to bring everyone back to the office as soon as possible.
“Corporate culture is important, and the only way for new employees to understand that culture is to be in the office working together,” he said.
Steig Seaward, national director of research with Colliers, agreed that being back in the office is about much more than productivity.
“They’re trying to get back the innovation and the ideation,” he said. “All of us coming together and talking and brainstorming here in person in Miami has been great, but if we did this over Zoom, the meeting would be over. People would start multitasking, reading their e-mail, checking social media and other things.”
Phil Mobley, director of U.S. occupier research at Avison Young, said relationship building is another important reason to be in the office.
“We work better with people we know,” he said. “As frustrating as it might be sometimes when people stop by and shoot the breeze, that’s actually better for the organization. In some cases, it can make sense to trade some productivity time to build connections.”
As companies plan for peak occupancy in the future, what role will flexible space and coworking play? Whelan said companies need to be careful about the strategy decisions they’re making for their portfolios.
“What we see today is a lot of big companies interested in it and doing surveys around it,” she said. “They’re trying to figure out what providers might meet their needs, but they’re not pulling the trigger on it in massive ways. My theory is that if they’re not welcoming their people back into an office that they can control, they can’t put them in a third-party place where they have less control over their health and safety.”
Co-locating with flex is a huge trend right now, Whelan said, at least from a sentiment perspective. And not just flex. There’s also shared meeting space providers, like Convene.
“You don’t have to build your own auditoriums and conference centers in your space, but you can share space or pay as you need it, which means more efficiency,” she said. “That works for companies that have a lot of consultants who come in, and they might want to push them into the flex space. It might also work for companies in a hyper-growth cycle, but they may not be sure when that growth is going to come, so they can push the growth to the flex space. The beauty of flex is that there are so many different use cases for it. It just depends on what’s driving your company.” Homa noted that in addition to shared conferencing from providers like Convene or Industrious, he’s seeing a trend of building owners who are amenitizing their buildings.
“They’ll turn the whole first floor, lower level or rooftop into a casual drop-in space with amenities and workstations,” he said. “Landlords are investing vast sums into amenitizing their space to lure tenants back to the office.”
Mobley said demand for flex space will rise and fall, but there will always be a need for it.
“If the big occupiers aren’t going for it in a big way yet, I suspect that’s because they don’t need to yet,” he said. “They are still trying to bring people back in. The people using flex space now are the people who want it. If you’re the Gen Z person who couldn’t move out of downtown, if you’re the millennial with two young kids at home, then you’re going to like having a coworking provider in your suburb. There is a small but meaningful portion of people who either really want or really need a workplace outside of their home.”
An ‘Uneven’ Office Market Across the U.S.
Julie Whelan, head of occupier research for the Americas at CBRE, said lease renewals are dropping as a percentage of overall activity right now, while new leases are picking up.
“What’s interesting is that subleases as a percent of new leases are 25% right now nationally,” she said. “Austin is already a resilient market nearing if not at pre-pandemic levels. Whereas in San Francisco, Class A rents from the second quarter of 2020 have dropped 10% already and are likely to see more downward pressure before a recovery starts. Primary downtown markets were hit very hard by the pandemic, and it’s going to take them some time to rebound.”