Although the COVID-19 pandemic demanded an immediate and dramatic exit from offices in 2020, most workers have since returned to the workplace. In fact, of the more than 70 million full-time employees in the United States who say they could do their jobs entirely from home, only 30% are actually working remotely every day, according to a June 2022 Gallup survey. The rest are working at least part of the week at an office.
Consider what’s happening in New York City, the office capital of the world. According to the Partnership for New York City, 49% of Manhattan office workers were at the workplace on an average weekday as of mid-September 2022, up from 38% in April 2022. During the same period, the share of fully remote office employees dropped from 28% to 16%.
Yet, the resurgence of office life doesn’t necessarily mean a return to pre-pandemic office environments. The realities of hybrid and flexible work have created a new kind of office worker who demands a new type of office building.
A market in flux
Cushman & Wakefield, Inc., AMO®, calls the current outlook for the U.S. office sector tenuous and highly uncertain. On one hand, it points out, employment in office-intensive industries like technology, financial services, and business services continues to grow, which historically has indicated strong overall demand for office space. On the other hand, many companies remain conservative in their view of commercial real estate due to lingering concerns of a potential recession and enduring ambiguity over post-pandemic work habits.
According to Cushman & Wakefield, the office sector is strongest in life sciences markets where there is high demand for both lab and office space, in large Sunbelt markets with strong job growth and thriving tech industries, in small Sunbelt markets with low cost of living, and in the recovering secondary markets in the Northeast. If you ask property managers, however, performance doesn’t just differ across markets, it varies even between assets.
“It depends on the building and on the tenancy,” says Charlotte Wilson, CPM®, managing director of asset services at Cushman & Wakefield, where she oversees Class A commercial office buildings in Northern Virginia, Maryland, and Washington, D.C. “In general, though, what we’re seeing among private-sector tenants is downsizing.”
Flight to quality
Downsizing is real. But it isn’t inevitable, says Jenni Woodruff, CPM® Candidate, ACoM®, who has observed a “flight to quality.”
“Tenants are moving to nicer buildings,” explains Woodruff, a property manager at Transwestern in Houston, Texas, who says new buildings are clearly outperforming old ones. “To compete, we’re seeing older buildings undergo major renovations to keep things fresh.”
While updating lobbies and common areas is typical, Wilson has also seen an increase in renovations that encompass spec suites—especially for smaller tenants. “Our leasing team is looking at how to accommodate smaller tenants for longer periods, so we’re starting to break up floors into smaller spaces,” Wilson says. “For example, we have a full-floor tenant in one of our buildings that wanted to extend their lease but give some space back. So we worked with our marketing department and our brokerage team to find out what tenants are looking for—what finishes they want and what layouts they need—and we turned that extra space into two separate turnkey offices that are ready to lease.”
Renovations include improving not only facilities, but also amenities, which can be modernized to keep office spaces functional in the age of hybrid work.
Nature, fitness, and community dominate, according to Woodruff, who says buildings that don’t yet have them are adding things like roof decks, fitness centers, and coffee bars. Buildings that already have those amenities are enhancing them with building-sponsored programming, like onsite beekeeping and gardening in outdoor spaces or personal training and group exercise classes in fitness centers.
“Buildings’ management teams are getting creative and trying different things to engage tenants and hopefully get them excited to go back to the office,” explains Woodruff, who says employees are willing to return to offices when they provide things that they can’t get at home. “People want a sense of community—places to gather as a group and things to do at the building other than sitting at their desk.”
Technology, too, can improve the tenant experience. Building apps, for example, can facilitate community by enhancing communications about not only building policies and maintenance, but also building-hosted networking opportunities and social events.
Apps can also integrate with access controls and occupancy sensors to make for a more frictionless tenant experience. In the case of access controls, apps can interface with Bluetooth-enabled readers to give tenants access to parking garages, entrances, and elevators with their phones instead of traditional cards. And in the case of occupancy sensors, apps can provide a real-time view of facilities so that tenants can see, at any given moment, how crowded the fitness center is, or whether a shared conference space is available.
Increasingly, the “flight to quality” includes migration to sustainable office spaces, according to Wilson. She says buildings may be able to minimize vacancies and maximize rent by commissioning energy audits and investing in green upgrades like energy-efficient HVAC systems, smart building controls, renewable energy projects, electric vehicle charging stations, and more. Buildings with those features, she says, help tenants meet environmental, social, and governance (ESG) objectives while also lowering operating expenses.
“One of the things new tenants look at before they come into your building is operating expenses, because they ultimately end up paying those as part of their rent,” Wilson says.
Because of vacancies and downsizing, controlling operating expenses is one of the biggest challenges facing property managers in the hybrid-work era. To keep them low, Wilson recommends collaborating with vendors to renegotiate and restructure service contracts. Take cleaning, for example. While it’s common for vendors to offer vacancy credits for empty spaces that aren’t cleaned, it might be more lucrative to eliminate unoccupied space from your contract entirely.
But operating expenses aren’t the only challenge. Other hurdles include supply chain delays and staffing shortages. To deal with the former, property managers must be proactive and order supplies and maintenance parts before they’re needed in order to mitigate potential delays. To deal with the latter, property management companies must continue expanding opportunities to recruit women, minorities, and young people into the profession to work as building engineers and more.
“We’re really great at hiring entry-level people who we can train up,” Wilson says. “It gives us a deeper internal talent pool, so we’re able to promote from within when we need to fill other vacancies.”
Therein lies the secret to a thriving office market: Although the nature of work will continue to change, employing talented, creative people who can change with it will help ensure that office buildings remain relevant to tenants today and for years to come.