By: Fernando de Nuñez y Lugones – Executive Vice President and Chief Economist
One of the most discussed issues since the beginnings of the Covid-19 pandemic has been the long-term consequences of working remotely and the implications it will have on the office market. At first glance, the main take away is that the demand for office space will decrease since most companies will have already adapted successfully to working virtually. There is no doubt that this pandemic will forever change the way in which we work, communicate, and socialize. However, it is important to explore some of the overall trends that will continue to shape the office market when the crisis is over so that we fully understand opportunities in that sector.
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Demand & Supply of Office Space
Office Demand: There are two main underlying trends. It is likely that companies will adopt more flexible working programs, allowing a higher percentage of their employees to work remotely. This will likely cause a negative impact on the office market demand. However, we will also see significant modifications in terms of office space layouts, including a decrease in the density per square-footage per employee. To meet social distance guidelines and new health provisions, the open small cubicle format will be revisited resulting in the opposite effect. This will increase the demand for office space with more square footage per headcount.
Overall, there are three types of companies that will require modifications in office spaces:
- Large Corporations: Large corporations will continue to have a strong presence in the brick and mortar world, since the location, building aesthetic and size is a reflection of their corporate image. This is especially true for service-oriented companies such as legal, wealth management, and consulting firms, where the customer experience is of primary relevance. The preferred location of large corporations is in the downtown/central business districts of metropolitan cities, while tech companies, cruise ship headquarters, and media companies have built larger campuses in more suburban locations. Corporations are also trying to reduce both the cost and risk of having a long-term office lease. For that reason, large corporations are segmenting their workforce into different locations (domestically and internationally), depending on their roles and seniority. This will average down their real estate cost. For decades, call centers, back offices, and design teams have been hired and then relocated to suburban or international locations. This trend, due to strong IT infrastructures, will continue to thrive after the pandemic is over.
- Small & Medium Enterprises: Small and Medium Enterprises (SME) not only account for the largest participation in terms of the number of employees and leasable square-footage of office space in the U.S. but also the fastest-growing segment. As such, SMEs will be at the forefront of the flexibilization of the office space.
Even though SMEs require a professional working environment with some level of exposure in terms of image and location, vastly operating from Class “B” office buildings, SMEs will also benefit from staff working remotely. The main drawback of SMEs is that they don’t have a strong IT support staff nor a solid IT platform. On the bright side, the adoption rate of cloud-based solutions has accelerated in the midst of the pandemic.
- Small Businesses & Sole Proprietors: The demographics of sole proprietors, freelancers, and entrepreneurs are gravitating more and more towards co-working spaces. Some of the advantages of co-working spaces include prime locations and class “A” office buildings, providing exposure, proper infrastructure, and networking opportunities. Another important asset to look at when discussing co-working spaces is their accessibility to public transportation and convenient walkability to retail stores, restaurants, bars, and entertainment venues.
- Office Supply & Layout: In terms of the overall new office supply growth, we expect to see a decline in the number of new projects and a decrease in the average size of the buildings. But more importantly, noteworthy changes in the layout design of new office spaces are on the horizon. Firstly, we predict that the average size of offices will be smaller. The new scale will be determined by the particularities of each submarket. In general terms, large offices of 10,000 square-feet, for example, will be less common. In counterpoint, we envision smaller offices emerging, ranging from 500 square feet to 2,500 square feet.
We also expect a strong increase in amenities offered in new buildings as a percentage of the total leasable area. Though this trend was already well underway, the pandemic has now accelerated this change. The future office building design will no longer only incorporate restaurants, gym access, meeting rooms, and training center facilities, but also a more complete technological suite, wellness component and social and resting areas. From an IT point of view, higher internet speed connection, redundancy systems, biometric access, smart technology inside the offices, filming and editing virtual room facilities, and concierge services are going to be more common. From a wellness standpoint, there are three main components that have a strong effect on employee productivity: air quality, light quality, and soundproof quality. For instance, individual AC units with high-quality hypoallergenic filters will become a new normal, potentially incorporating probiotic spray dispensers to diminish the risk of harmful bacteria and viruses, bright light programming to improve performance, filtered vitamin water to keep employees hydrated and soundproofing to foster focus and increase quality remote communication (virtual presentations and meetings).
Limitations of Working Remotely:
Despite the benefits of working remotely, companies and employees still see significant challenges in the work-from-home model.
Employees: There is no one-fits-all solution. Working from home, no matter the circumstance presents its own set of challenges. Recently during the pandemic, some of the work-from-home issues that employees have been faced with include:
- Household Structure: In many cases, the presence of children, parents, and even couples does not provide an adequate work environment for employees in terms of concentration, image, and productivity.
- IT Infrastructure: Internet speed is variable depending on the location and service provider. In addition, the cost of the quickest connection is often covered by the employee. Outside of internet connection and speed, access to quality printers and scanners is not widely available in most households and the sound quality of personal computers is often not proficient. However, collaboration software like Microsoft Teams, SharePoint, Asana, and Google Docs has helped teams to work more successfully.
- Physical Workspace: Strategizing where to work from home has its limitations due to size, layout, and furniture. Some jobs also require special equipment not readily available. These accommodations could potentially consume significant space.
- Personality: Some people are not susceptible to perform at their peak if not working from a standard office. Household distractions, lack of motivation, and supervision are three of the many factors that lead to lower productivity. On the contrary, many jobs are based on a strong collaborative effort. Though digital applications like GoToMeeting and Zoom have been quickly adopted to increase teamwork, there are certain jobs where in-person meetings are still preferable, especially in newly formed teams and recent hires.
- Corporate Culture: It is difficult to create a company culture without a physical space to meet in person on a regular basis. In addition, the social interaction amongst employees is a large contributing factor to the overall brand narrative. When that opportunity to meet goes away, it’s like having a family with no home. However, the longer the tenure of the employee, the easier it is to preserve the company’s culture while working from home.
- Lack of Control: Many employers feel uneasy by not having a clear understanding of the actual working hours and productivity performance while working remotely. Currently, there are several software companies developing solutions to mitigate this risk. Again, different job descriptions require different infrastructure capabilities and control.
- Uniform IT Platform & Support: One of the main challenges to working remotely is having a homogenous IT platform that successfully fosters collaboration and minimizes training needs. This includes, but is not limited to ERP, CRM, Communication Software, Backup Systems, and Intranet. Companies are also using software programs like Team Viewer to provide access to employee’s computers remotely to better provide IT support and have ownership/control of the equipment.
- Compliance & Security: In certain industries like financial services, government agencies, and research/development corporations, compliance is an issue. In addition, the potential security breach from home is far riskier, comparing with stronger firewalls at company offices. Many companies also possess their customer’s confidential information, making IT security protocols even more robust.
Advantages of Working Remotely:
Employees: When working from home, employees have more discretion as to how they distribute their schedule. It allows for more time for personal growth such as exercising and studying since the commute time is now distributed between personal time and the increase in networkable hours. That being said, employees also risk distractions, socializing, longer meetings, and breaks. But in the short term, working-from-home has proven to increase productivity and allow employees to focus more on long-term projects.
Companies: Having fewer people in the office generates savings in terms of overall office space, parking spaces, utilities, equipment, food and beverage, and more. In fact, this is appealing to many companies. Additionally, the readability of hosting virtual meetings has changed the expenses equation, representing a decrease in employee’s mileage reimbursements, the opportunity cost of traveling time, and fewer meals and entertainment. Taken into consideration all the savings mentioned above for companies, working remotely is an attractive value proposition.
The Covid-19 pandemic has caused a reassessment of the advantages and disadvantages of the work-from-home model. In the future, there will definitely be changes in the way we conduct business and how these new trends will impact the demand for office space, layout design of offices, changes in the average size, and access to amenities, in the context of constant technological improvements. New office buildings will benefit significantly from these innovations if they incorporate office tenants’ and employees’ new preferences. Some existing buildings will be required to undergo significant reconfigurations and improvements and it is likely that older buildings will face higher vacancies. In counterpoint, new buildings will enjoy lower vacancies and higher rental prices per square footage.
This process will take some time and its evolution is expected to be similar to the retail world’s historic evolution, where e-commerce continues to rise as brick and mortar stores continue to evolve from merely showcasing goods to providing a brand-inspired experience. During this transition, we will see more flexible working programs, while technology continues to evolve. The adoption rate of new technologies for both companies and employees will continue to rise at a faster pace.