What is the future of office if remote technology can be accessed by employees just about anywhere? While maintaining a stable of state-of-the art office gadgets is cost prohibitive for most workers, technology has advanced so much that most laptops (and most cell phones) can simulate – and according to some measures can improve – a productive office environment.
Accelerating the advent of the remote workforce are smart, inexpensive (and sometimes free) software applications such as Gmail, Zoom, Duo, Google Docs, Slack, and many others. Tangentially, the last 10 years have fostered an acceptance that social media can be a rewarding substitute for face-to-face friendship, and the tech start-up economy has re-emerged from its death spiral in the early 2000’s to become the U.S.’s most respected industry.
Entrepreneurial millennials (and other Gens) have flocked to the cities seeking interaction with likeminded individuals. The upfront costs and commitment period for office space has increased out of sync with the needs of fledgling companies that cannot mitigate the risks associated with long-term leases. Equally uncomfortable have been increases in costs of living in urban centers, which have not only created excess demand for decent places to live, but have impacted most aspects of a balanced lifestyle.
The pandemic took away the office. People who lived in urban areas were at greatest risk due to the density of population, and technology was good enough that people could work remotely, stay productive, and in some cases flourish. Then the pandemic took away the lifestyle. People started moving away from cities, and it became immediately obvious to most companies that the enormous costs of maintaining offices, staff, equipment, and even co-working spaces, may not be necessary. the reliance on personal interaction for a productive office environment has become philosophically threatened.
If offices stay empty, a daisy-chain of economic disasters threaten to ricochet throughout the cities, particularly New York, which has approximately 470 million square feet of office space, about 25% of office space in the entire US.
Local businesses, including retail, hotels, and restaurants, which rely on commuters and office workers remain in limbo and risk failure; residential real estate prices in Manhattan are still depressed; the MTA, currently suffering from dramatically reduced commuter ridership, could fall into disrepair, and eventually may go bankrupt. Unable to pay obligations due to reduced tenancy, Commercial Mortgage Backed Securities could collapse, and similarly Mortgage Backed Securities will follow. With an annual budget of 90 billion, with 2/3 coming from property taxes, NYC is at also at risk of economic collapse.
THREE IMPORTANT CONCEPTS SUPPORT A REBOUND:
- There is ample evidence that despite the rationale that offices are unnecessary and too costly to maintain, most companies want to keep them, and most office workers want to work there.
- Despite significant economic uncertainty, many tenants continue to pay rent, and NYC continues to receive the majority of its expected property tax revenue. Some companies have actually expanded their presence in NYC.
- New York City (which has a GDP of $1.5Trillion) and cities collectively, are too big to fail, and their demise threatens the entire economy of the US, and subsequently the world, and thus public policy must be keen on stimulating a rebound.
What is the short and long term outlook on the office market? CBRE and Brookfield Properties, two of the largest office real estate companies with billions in holdings spanning the globe, have both come out with reports describing their vision of the offices of the future, how things are now, and what challenges stand in the way of getting there from here.
“The function of the office will shift from traditional work processes and oversight to more collaborative, educational, and social needs of a growing hybrid workforce.” CBRE – Future of Office
Published June 2020 as “The Future of Office”, CBRE interviewed 126 senior level global RE executives to determine how the pandemic will change location, design, and use of space. 49% felt the business outlook would improve in the next 6 months, with 24% saying things could get worse. 78% of respondents said the physical office will remain important, and 38% said it will remain important if not more so.
73% expect flexible office space to play some role in the future, but even before the pandemic, most workplace strategists were becoming less dependent on the physical office, and employed remote office architecture to benefit the needs, preferences, career, and life goals of their employees. Respondents feel this trend is accelerating, and only 10% expect no remote policies in the future.
A distinction should be drawn between remote office work, and a hybrid approach – many feel the former is an all-or-nothing concept with worker never going into the office, whereas the latter involves moving fluidly from outside to in-office work, depending on what makes the most sense, most productive, or most convenient. 61% of respondents intended to offer their employees hybrid work moving forward.
Interestingly, 42% of respondents planned to offer hybrid working arrangements pre-COVID, and 83% reported that at least moderate changes were already underway. Now, corporate leadership and the workforce are aligned that the ability to choose where one works is a necessary option, and increasing the role of technology for this transition have moved close to center.
Broadly, respondents showed little sentiment to leave the urban environment. And though there has been recent interest, even pre-COVID, to establish suburban offices, few transactions have been completed. Corporate culture, innovation, and personal growth may be maintained in a remote workplace, yet most respondents feel strongly that these factors are can only originate, adapt, and grow through a strong connection to a hub. Though all expect unique challenges, it is believe the pandemic will continue to usher innovation, including new tools and technologies to make the office a greater source of efficiency and problem solving.
“…Successful companies invest heavily in recruiting, onboarding, training, mentoring and advancing these workers. In a virtual environment, collaboration, ad-hoc interactions, personal attention and mentorship become much more difficult. And making newer hires feel invested in a company’s future can be next to impossible.” Brookfield - “The future of the Office: Not What You Might Think”
Brookfield owns and operates Class A office buildings, “top-quality buildings in major urban centers with amenities catering to a “live, work, play” environment”, which they feel are more resilient to challenging environments. Citing China and South Korea, countries that have been hailed as most successful in the response to COVID-19, Brookfield’s office towers in Seoul, for example, are 90% occupied. Furthermore, leasing activity has remained solid, and they believe the US markets will bounce back similarly when the pandemic gets under control. Longer term, Brookfield also expects a hybrid workforce is more likely, and does not expect a fully remote workforce to be sustainable:
“While remote work can improve work/life balance among employees, extended periods at home can be detrimental. In a recent report, the National Bureau of Economic Research found that work-from-home days are longer (by 49 minutes), with more meetings to attend and emails to answer. Working parents risk burnout from trying to balance work, home schooling and childcare. Loneliness can mount among singles and others who live alone. And beyond mental health risks, increased sedentary time can also take a toll on employees’ physical health and well-being.
For companies, the negative effects of remote work over the long term can be stark, threatening not only their culture, but their very future. Over the years, our tenants have consistently told us that junior to midlevel employees are the linchpin to getting the culture right (or wrong). These workers are not only a company’s eventual leaders, they’re key to innovation in the present, helping ensure that the firm can adapt and grow with the times. As much as half of a company’s workforce can consist of employees hired in the past five years.
Retaining junior employees is challenging enough under normal circumstances—companies typically lose up to 15% of their workers to annual turnover, with a large portion being junior and midlevel employees. This is why successful companies invest heavily in recruiting, onboarding, training, mentoring and advancing these workers. In a virtual environment, collaboration, ad-hoc interactions, personal attention and mentorship become much more difficult. And making newer hires feel invested in a company’s future can be next to impossible.
The report went on to express that only 12% of US workers want to work from home full time, according to Gensler US Work from Home Survey, based on a panel of 2300 workers employed by companies with 100 or more employees across 10 industries, and conducted April 16 – May 4, during the heart of the first wave of the pandemic lockdown in much of the US.
This begs the questions…why aren’t these workers at the office already…and what does a landlord need to do to get them back? Perhaps the biggest thing keeping office workers from coming back, is a lack of inspiration from traditional office spaces. According to an article in the Harvard Business Review, “Reimagining the Urban Office”, the authors explain that over the years office environments have helped people thrive at work. They define thriving as “the joint experience of vitality and learning, and it is linked to better job performance, creativity, and well-being, and more positive interactions among colleagues.”
The authors go on to echo Brookfield and CBRE, and illustrate further in support:
Beyond relationship building, offices matter for a host of other reasons. Both people and organizations use work settings as a means of expressing their values and aspirations. The design of physical places helps us express our professional identities. While ubiquitous virtual work is working — for now — many of us are still functioning from cultures, norms, relationships, and practices that were in place prior to the pandemic. If we wish to change or adapt any of those factors in the future, it will be difficult without some degree of physical presence. As a corporate CEO told us in a recent workshop, “You can’t change a culture over Zoom.”
They propose a different type of office structure, one that has a corporate headquarters distributed throughout a city, and is divided into smaller workspaces, with locations closer to where people with similar professional interests work. IT and web developers may work closer to a start-up hub rather than in the same building as HQ. The finance team could work near Wall Street and be closer to other financial professionals. Co-working like options are an exemplary model for what a more distributed network of workspaces could look like:
“One challenge of the traditional centralized office is that interpersonal communication across floors and buildings is seldom. Subdividing urban office buildings into smaller work units for multiple businesses, with shared amenities, would help solve this problem. More public-facing spaces would make the office more inviting by allowing people to interact and build relationships across units, or retreat to private work areas at their will. In addition, mixing business offices with amenities such as event spaces, restaurants, and gyms within commercial buildings would allow these sectors to complement rather than compete with one another.
For example, bars could be placed at rooftop level to take advantage of a building’s views while fitness spaces could be located on a mezzanine or at mid-level to take advantage of larger floor areas. This idea of thoughtfully distributing spaces and services throughout one slice of real estate borrows from a strategy that has been used by the hospitality industry over the past decade. Hotels combine destination services like co-working space with retail, coffee shops, and themed dining venues to attract visitors and locals alike.
This, in turn, increases the attractiveness of certain neighborhoods to businesses offering complementary services. Such adaptive reuse strategies can change the character of urban neighborhoods, which has been the case in places like Downtown Los Angeles, the far West Side of Manhattan, and Downtown Detroit. In each of these areas, commercial vacancies have decreased and the number of housing units has increased. We imagine an urban future where these changes offer services, housing, and jobs for people across the income spectrum so that cities ultimately do more to support people in an equitable way.”
SO WHAT'S NEXT?
Though it seems many businesses have not given up the office, and many workers don’t want to work from home forever, landlords face significant challenges if they want their buildings to be full, and for their tenants to be happy. Providing all the bells and whistles by redesigning a building to be as advanced as THE EDGE would certainly increase the draw to any office building, but this is not only cost prohibitive, it would take years most landlords don’t have.
Helping a worker thrive, on the other hand, in addition to well-thought out pandemic related safety features is something that may be doable through collaboration with other landlords and businesses throughout the cities, perhaps speared on by some well-deserved federal stimulus.
If traditional landlords allow themselves to become open to allowing a host of businesses to integrate with traditional office spaces - perhaps even retail and service providers including stores, gyms, cloud kitchen nodes, and similar – this may provide an interesting and creative environment suitable to many businesses and their various teams of workers.
This can be accomplished by connecting available workspace through software applications designed to showcase amenities, which should include the cultures and interests of the people working in the same building, with businesses and teams looking for interesting places to thrive.
