Offices Are Empty

What is it Going to Take to Bring People Back?

Offices are empty.  If you need proof, look no further than Kastle System’s Back to Work Barometer:

Empty and vacant have very different meanings as empty infers that there is a contracted tenant, presumably making rent payments, just not using the space.  However, empty can easily lead to vacant if the tenant decides to keep their staff remote when their lease expires.  As employees get comfortable with zoom meetings and no commute, and executives and investors think through the significant savings from shedding expensive real estate, mass vacancy is becoming a real possibility.  According to GlobeSt.com, Moody’s is forecasting vacancy rates this year of as high as 21% in New York and other larger markets.

I’m not betting against commercial landlords, but the big question is: “What is it going to take to bring people back”?  With the commercial office market being one of the largest asset classes in the world, the amount of money at risk is in the trillions of dollars.  Landlords have to place their bets wisely as they navigate these unprecedented times and they will need to make investments in the areas that they believe will bring people back.

Amenities 

Amenities is the catch-all term for perks used to attract tenants.  Outside of price, amenities are the lever that landlords have at their disposable.  There is no shortage of them to invest in from safety focused amenities, such as touchless access/elevators and in-house health clinics, to convenience focused services like fitness centers and even onsite daycare.  Perks like free lunch that were once offered by the tenants to attract talent, may very well transfer to the landlord's P&L.  Property Manager Insider recently ranked the top 10 amenities that offices need to offer to attract and retain tenants, and although it covers the usual suspects, the amenity that I believe will come at the top of the list is flexibility. 

Many people would not classify flexibility as an amenity, and prior to the pandemic I would have agreed with that point of view.  As I was researching this article, I got into spirited debates with industry professionals who I look up to and like to bounce ideas off of.  One contact felt as though fitness centers and yoga classes should be classified as amenities while flexibility should be classified as a necessity.  Another contact felt strongly that my use of the word did not box with how people think of amenities.  However, since it is such a prominent factor in the leasing decision of so many companies right now, I cannot find a more fitting classification for the word in this new world.  

COVID shined a light on the fact that many people like to work at home, many people like to work in an office, and most people want a combination of both.  Some people want to work in an office, but they want that office to be closer to where they live.  It used to not matter what people wanted; their job required them to be in the office 5 days a week, and if they wanted a paycheck they needed to follow the rules.  The pendulum of power swung in the direction of the employees during the past year because as a society armed with amazing new technology, we demonstrated that we can still be efficient working from home.  Now that companies are taking note, and many have changed to “remote-first”, employers need to find a way to offer flexibility if they want to recruit and retain talent.  That responsibility ultimately falls on the landlords as they compete for tenants.  The other amenities are still important, and it will be interesting to see what property owners roll out, but I believe that any offering needs to incorporate a solution to allow tenants to use space the way that they need it.... a combination of traditional leases, coworking, short term private offices, and on-demand.

I was fortunate to have some of the nation's largest and most prominent commercial real estate owners contribute to this article and discuss their view on bringing tenants back to the office.  Their focus is on creative ways to make sure that their tenants have a safe environment to return to.

Marc DeLuca: Regional President, eastern United States at KBS

“At KBS, we pride ourselves on finding innovative ways to make it easier for our tenants to return to the office when they are ready. We recently collaborated with Maptician, a program which allows KBS to help tenants reconfigure community spaces and amenities and map out future office space while taking into account CDC guidelines for fighting COVID-19. Using technology, KBS is able to help tenants assess social distancing risks within offices, perform contact tracking, and plan a staged return-to-work strategy, key concerns for tenants navigating both new and renewed leases during a pandemic.” 

David Neil:  Principal of The Durst Organization

“The great outdoors are “in” at the office, and provide companies an added incentive to hasten their return.  Landlords are innovating and experimenting with new ways to encourage companies back to physical office spaces.   One trend deserving more attention: offices with direct access to private outdoor space.  Before the pandemic, access to outdoor space was a critical selling point to prospective tenants.  Our experience with lease transactions during the pandemic is that outdoor terraces are of even greater importance now for companies committed to providing their employees with inspiring and healthy workplaces.  Until recently, building setbacks were often unsightly from adjacent spaces; now they are assets that green, literally, and figuratively, our cities and improve the environment and mental wellbeing.  While terraces are not a panacea for the challenges we face, the focus on outdoor spaces and the emphasis on the wellness of the people who use them is part of a larger approach to make corporate offices and our cities even more appealing.   As owners of real estate, we need to remind our customers and potential customers of the purpose —the why — of best-in-class physical office spaces.  Companies will rightly continue to allow employees to work remotely to mitigate public health risks and accommodate individuals with special health considerations during the pandemic, but this will be temporary in nature.  Outdoor terraces offer companies a compelling reason to come back to the office, to attract and retain the best talent with inspiring and productive environments.   Our workplaces will ultimately emerge from the pandemic smarter, healthier, and better than before.” 

How will Flexibility Work in the Future?

What still remains undetermined about the future of office space is whether operators will continue to sit between landlords and tenants or will building owners provide flexibility on their own.  Enterprise customers, which operate in multiple cities, do not want to have to deal with different landlords who each have their own policies and terms.  An operator or marketplace can sit in the middle and provide one seamless experience to customers regardless of who the landlord is.  Companies like Liquidspace and Upflex have negotiated standardized contracts with property owners in thousands of cities.    They have built portals that provide enterprise clients with the ability to book space, regardless of landlord or geography, through a single site.  Mark Glibreath, Founder and CEO of LiquidSpace, recently announced their "Work From Anywhere Management tools to provide flexibility and choice to employees, while maintaining control and fulfilling on a duty of care."  Conversely, many landlords were burned by operators during the last year who pulled out of or defaulted on lease obligations (they were mostly burned by operators, not marketplaces).  Additionally, landlords are not going to want to lose the margin to an intermediary.

Several large property owners have already started rolling out their in-house flexible brands.  Tishman Speyer has launched their own branded offering “Studio” which has locations in NYC, Boston, Los Angeles, San Francisco, Washington DC, Chicago, and Brazil.  The Durst Organization is looking to utilize portions of its vast portfolio of over 13-million-sf for flexible real estate through in-house brand “Durst Ready”.  Brookfield, in partnership with JLL, is launching their first in-house flexible offering “Orchard Workspaces”, a 50,000-sf  campus in Brooklyn’s MetroTech.

I believe that we are at the beginning stages of an arms race in amenities, and tenants are poised to be the beneficiaries.  It is often during challenging periods where the best innovation takes place.  I anticipate a lot of exciting new technology in the commercial real estate space, and while much of it will be around health and safety, we will also see a wave of new conveniences.  All of this new technology will play a role in luring people back to the office, but the biggest impact will come from the solution that allows employees to use space where, when, and how they want to.


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Apollo provides a trial version of their product to test drive. Please use the link below to check it out.

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