Over the course of the second quarter, the US struggled with the difficult dance between slowing the spread of the coronavirus and shoring up the economy. The second quarter saw massive government assistance through the Cares Act and a scramble by businesses (4 million in total) to access billions of dollars through the Payroll Protection Plan. Government intervention provided temporary relief to individuals and small businesses and reversed the earlier freefall of the stock market. This relief in combination with a “flattening of the curve” of coronavirus infections led the country to begin to open. As we all know the opening process began as early as late May in some places, but the virus did not cooperate. As Dr. Anthony Fauci said early on “You don’t make the timeline, the virus makes the timeline.” Many parts of the country are experiencing a second wave of rising infections which most experts predicted would happen in the fall.
There is no sector of the economy left unaffected by the pandemic, but the effects are certainly not evenly spread. That is clearly true for commercial real estate where hospitality and retail are suffering mightily while the rise of e-commerce has spurred significant increases in industrial real estate values. The Washington, DC region has fared better than most. Government and contractor jobs are minimally affected by the closures and the region has been the second largest recipient of new contracts under the Cares Act and other relief bills, second only to Georgia (home of the CDC).
One of the big questions being discussed among industry participants is what will happen to the office market? There are immediate questions which need to be answered as the country begins to open and workers go back to the office, and there are longer term implications of the pandemic in how and where we work, not to mention the overall need for office space. Let’s start with the short term.
Building owners will need to make sure that individuals feel safe in the work environment. In addition to the use of masks and social distancing, which the public understands, building owners can make their buildings safer by reducing the public surfaces that need to be touched through the use of technology, adding antimicrobial finishes in the common areas and rest rooms, increasing fresh air in the HVAC system and utilizing high-efficiency filtration. Other HVAC technology solutions such as ultraviolet light and dry hydrogen peroxide technology may be used depending on the specific building.
Surveys have shown that only 10% of the workforce wants to work at home 100% of the time. Approximately 70% of workers want to work more frequently at home, but still want to go into the office. Most companies view the office as the place where corporate culture is formed, training takes place, and collaboration is most effective. As working from home extends, the connection between companies and their employees is stressed, making it a much more challenging for most organizational leaders. Recognizing that social distancing may be with us for a while, companies are exploring an expansion of their square footage per employee, which would likely have a positive or expansionary impact on demand. Nevertheless, if the pandemic stretches on, it is hard to imagine that companies will not feel pressure to reduce their footprints if they are not using their space.
Another emerging trend that companies are exploring is establishing a hub and spokes configuration where the central office is the hub and satellite locations, flexible/co-working space or work from home alternatives are the spokes, and it appears more companies will be using co-working or flexible office space in the future to provide optionality to their space requirements.[1]
One other point to consider is the emergence of urbanizing suburban centers around transportation nodes. Millennials are having families and moving to the suburbs, particularly suburban areas with urban attributes. NAR national data shows that only 15% of millennial home purchases in 2018 were in an urban area. The pandemic has reinforced the trend of a need for more space at home, both indoor and outdoor, and a shorter and safer commute. Companies are looking hard at the idea of relocating or controlling space around these nodes as it brings them closer to where their employees live, and the cost of the real estate is cheaper.
With so many moving parts, countervailing forces, and uncertainty in the office environment, there will likely be opportunities to acquire office buildings and to effectively configure space to those who are seeking a new post-pandemic work environment. However, we must remember that we are still in the early innings and uncertainty still prevails.
[1] “Flexible office space providers will emerge from this recessionary period as stronger and better regarded than before. Landlords are recognizing that they can play a larger role in the success of this market by offering their own flexible space solutions or in partnerships with third-party providers.” CBRE- “The Future of Office” July16, 2020