How the COVID-19 Crisis Will Impact the Office Market


“Never make predictions, especially about the future.” – Casey Stengel

As we all continue our new routines working from home, many of us are wondering if this work arrangement will represent just a temporary blip on the screen or a permanent paradigm shift in the way we work. On the heels of a major catastrophe, there is a tendency to jump to rash conclusions about how we live and work.

For example, after 9/11 many people questioned whether anyone would ever work in a trophy office building again. Over time, we moderated our response and, though we took new precautions and changed our building codes, the office market ultimately returned to normal.

This time I think things will be different. Perhaps because this crisis is affecting so many of us and for an indefinite period of time, I believe there will be some meaningful and permanent changes to the way we operate our businesses and consume real estate going forward.

Here are six predictions:

  1. More employers will adopt “hoteling.” We have certainly come to realize that a lot of the work we do can in fact be performed remotely and people like this flexibility. However, our time away from the office has also reinforced the importance of community and our need to have a place where everyone can come together. As a result, companies will balance these competing needs by reducing the number of dedicated desks or seats and creating more hoteling spaces. This will allow companies to reduce their physical footprints and real estate costs and materially reduce demand for office space in most markets.
  2. Greater emphasis on collaborative spaces. We will realize that a lot of the quiet, “heads down” work that people performed in their offices or cubes can in fact be done at home. If people can stay at home and do a lot of their work, what role or function should the headquarters space serve? Companies will start to appreciate that the headquarters is a place that people come to find community, interact with their colleagues and, frankly, get away from the isolation of home. When planning the office, the main focus will be on creating community spaces that foster this type of interaction like in co-working spaces. Likewise, landlords will continue the current trend of creating more communal spaces in their buildings so that tenants can interact with each other. Building lobbies will become town centers for the tenants designed (and tenanted) to attract people and promote interaction.
  3. Acceleration of the trend toward smaller offices. What we have been missing during this period of sequestration is social interaction. Companies are realizing that, the larger someone’s office, the less likely they are to leave it. Offices will continue to shrink in size as companies try to encourage their senior leadership to get out and interact with their people — the thing we have missed the most over these past weeks.
  4. More flexible rent structures. There are certain established customs in commercial real estate that people blindly follow because, well, “that’s the way it’s always been done.” For example, why do tenants need to pay the same rent every month with no flexibility to spread the annual obligation over the term in relation to their seasonal cash flow? Why should a bad month or two of business put at risk a 10-year lease obligation and require the tenant to beg for the landlord’s mercy, especially when the tenant has always paid its rent on time? The current COVID crisis is demonstrating the extreme vulnerability of many tenants to just a month or two of poor sales/revenues. In the future, leases will provide more flexibility to defer or prepay rent for certain periods of time. For example, tenants will have the right to defer rent for up to three months provided they post a three-month letter of credit at the outset of the lease. Lenders will need to adapt to this new reality.
  5. More spend on information technology. Bet you wish you invested in Zoom about two months ago. Well, rest assured that your company will be heavily investing in Information Technology in the months ahead as it works to accommodate the growing number of remote workers and plans for the next major catastrophe. Businesses are incredibly resilient. On 9/11, New York City lost millions of square feet of office space in a single day and yet companies reopened in hotel rooms, homes and temporary spaces within just a few days or weeks. The coronavirus was a wakeup call for many companies that they had no real contingency plans in case of emergencies. More companies will be prepared for the next crisis by relying on technology.
  6. The independent contractor explosion. Companies are going to assess more critically the makeup of their workforce and determine who needs to be a full time employee and who can be an independent contractor engaged on a project by project or hourly basis. If someone can truly work remotely and independently, do they really need to be an employee, or can they be an independent contractor? By untethering people from the office and fixed payrolls, businesses will gain more flexibility to grow and contract their work force and also significantly shrink their physical footprints. Office space represents a bet on a company’s long-term future. If you guess wrong and have too much or too little space, it can have devastating effects on your business. By outsourcing more staff, companies will be able to shorten these bets and, therefore, reduce their real estate risk.

Conclusion. Other than the two world wars, no event in the past 100 years has impacted the daily lives and businesses of as many Americans as this pandemic. As we adjust by necessity to these difficult times, we will learn to appreciate things we took for granted only weeks ago and will also realize that it’s probably time to make some permanent adjustments to the way we conduct business. We read the tea leaves and came up with our own predictions. However, the great thing about predictions is that, a year from now, no one remembers if you were wrong.

This article was published in the Philadelphia Business Journal on April 28, 2020.

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