Evolution, Economics And Commercial Real Estate: How Supply And Demand Has Led To Office Adaptation
Commercial real estate has invoked Charles Darwin this year as the evolution of office space and analyzing work, the workplace and what’s next are at the forefront of workplace strategy.
In this evolution of office from property asset to people, five key themes have emerged. Our firm’s 2021 "Breakthrough Insights" report outlines them as follows: • Overproduction: The sector has produced too much of one product, therefore the future will involve more dispersion and more diversity of space. • Adaptation: Shifting from property outcomes to people. Work is not a place; it’s a thing you do. • Competition: Corporate drive for agility will create competition in the market, and, ultimately, greater choice for commercial real estate. • Variation: The workplace sector needs to provide greater variation of product. Flexible workplace supply, we predict, will grow to over 21% in 2021. • Speciation: Commercial real estate will evolve on the wave of proptech driving end-user experiences. The employee has become the ultimate consumer, meaning commercial landlords need to adapt, and quickly. MORE FOR YOU
These topics come to life in the future of office space. The pandemic has upended supply and demand. High-density urban cores, reliant on suburban mass transit, have too much supply, while the demand in car-friendly suburbs and secondary cities falls short by lacking dynamic and modern supply. Moreover, the idea of a five-day/week office is thoroughly disrupted. The need for diversity of space to accommodate the consumerization of office space will drive building owners to evolve and adapt — or perish. This past year has forced businesses and commercial real estate occupiers to rethink the fundamental ways in which they conduct business, and we are seeing this from city to city as well as in central business districts and the suburban areas around them. Do you really need a corporate headquarters in a central business district when, according to our research, 57% of employees want an office closer to home? Is that office space worth it when the alternative — “rightsizing” — could save that firm more than 20% on rental rates while also saving its employees 1.5 hours a day in commuting and, at least in New York, up to $7,000 a year in saved mileage costs? Further, are you still confident in your 10-year lease? Does this, and the rest of your real estate portfolio, keep up with the speed of business? In the corporate real estate world, one thing Covid-19 taught a hard lesson on was agility: If you wanted or needed to, could you adjust your lease and your real estate spaces? Did you have office space where you needed it most?
For many companies that answer is no, at least not completely. Businesses and their teams are assessing the benefits of a more agile, dispersed portfolio approach that offers them more locations. They won't ditch their city-center hubs completely, but they are unlikely to renew the same spaces. Large corporate occupiers will be seen downsizing into agile and diverse spaces as well as branching out into hub-and-spoke spaces with more flexible lease terms. Mid-size companies could be looking at a variety of office occupancy types, from turn-key solutions to pay-as-you-go flexible (day pass/membership) locations.
In the case of New York, we estimate that more than 175,000 people are employed in financial services alone and live within 30 minutes of the suburbs of Huntington, Long Island; Nyack, Rockland County, New York; and Trenton and New Brunswick, New Jersey. It's no wonder employees are interested in new locations where they can work outside of their homes in a collaborative environment without having to travel to the main headquarters.
We are also seeing this play out in Denver, where our report finds that demand increased by 22% from the first to second half of 2020 and workstation rates increased by 11% over the same period. Similarly, in Austin, demand increased by 20% from the first to second half of 2020 and workstation rates increased 3% over the same period. Yet in San Francisco, where the cost of living is significantly higher and people were able to work remotely due to Covid-19, we found that demand dropped by 9% from the first half to the second half of 2020 and workstation rates dropped by 9%. In cities with overproduction, Class A office buildings and not enough companies who want to return or lease new space in a traditional long-term commitment will make relics of 30-story buildings comprised of long-term (10-plus year) office leases.
Instead, landlords of commercial buildings will be embracing adaptation. They are already looking at a hospitality-inspired approach and shifting from long-term traditional leases to a new and updated building stack. The new building mix is likely to designate some floors to short-term leases and others to long-term leases; along with floors built in for flexible work. The flex spaces could either be landlord or operator-run. Within them, collaborative design should and will become paramount, as better use of shared spaces helps reduce portfolio size in both the short and long term.
It also means that landlords need to cater to their consumers more than ever, and as companies have shifted their priorities from client to employee, so too, do landlords need to think about the positive effect their buildings can have on the people who work in them. This has led to a marked increase in amenity offerings by landlords and operators, to market their buildings with fitness, lifestyle and wellness activities and programming to incentivize people to come into the office, better technology to ensure connectivity for work/meetings and “resi-mercial” design to create a more comfortable environment for collaboration.
Like species, office space is proving to change over time, and as companies head back to the office, it will most likely be an evolved one.