Don't Expect Normal After the Vaccine's Arrival: How Workplace Strategy Will Change Forever
COVID-19: A Catalyst for Workplace Strategy Disruptions
Dedicated home office space is now replacing the formal dining room in most new home builds. But, if you had pitched this as a spec build concept to a homebuilder a couple of years ago, you'd be laughed out of the room. Fast forward to today, and that is precisely what's happening.
The alignment between an organization’s physical workspace, its culture, technology, and most importantly, its workforce, is changing. And, COVID is merely accelerating an already existing trend.
Businesses have long sought to maximize their organization's productivity through their office space. Closed and partitioned offices gave way to open concept, cost-effective space, which even led to unique campus-style complexes. Each new study purporting breakthrough insights into workplace habits and human interaction result in a rush of workspace changes. Maximizing productivity and minimizing costs remain a worthy pursuit, but one that will look vastly different going forward.
Ultimately, a business’s goals will remain the same: find a way to properly marry all significant facets of an organization searching for maximum output. But workplace strategies are changing, and data aggregated by leasing giant JLL suggests a large portion of employees want to continue living and working remotely full-time, post-pandemic.
So, what does this mean for the real estate industry? Let’s unpack it.
A Shift in Real Estate Development Trends
Global trends and macroeconomic forces drive development activity much more than most real estate professionals care to acknowledge. Admitting so requires they leave the comfort of their "it's a seller's market" armchair and dive into the study of human behavior, how macroeconomic trends impact real estate markets and government policy’s role in affecting both.
It would be overly simplistic to hazard that new office development will cease to exist in the future. Still, lifestyle changes will be impossible for the industry to ignore. As many businesses continue to operate remotely, some have determined they can downsize permanently and reduce their fixed expenses. These changes have already resulted in downward pressure on office rent prices.
Equally notable is the rise of space available for sublease. According to JLL, the Raleigh and Triangle real estate markets added over 300,000 square feet of vacant sublease office space between Q1 and Q3 of 2020. So, despite an office rent collection rate of over 90%, workplace strategy is changing, and tenants are looking for ways to backfill space they don’t need.
These trends will result in several changes to the development industry. First, look for more modular office condo developments embedded in mixed-use projects. A push for de-densification is driving business away from packed central business district centers. New workplace strategy calls for more flexible real estate options, and modular development provides a level of uniformity for ease of flexible tenant ingress and egress. As the speed of tenant turnover increases due to a need for greater flexibility, landlords will be able to re-let the space inexpensively because of its uniformity.
There is also momentum behind flexible hybrid workweek schedules when businesses return to the office "full-time." Workplace strategy will integrate remote work, and employees will only be expected to work a certain number of days in the office. Office space will only need to house a fraction of the total workforce on any given day. These modular builds would be conducive to corporately leased space that controls capacity and promotes employee wellness through desk hoteling and hot desk strategies. Not to mention, the reprioritization of physical space in a business’s strategic plan will help in accessing a larger talent pool despite traditional geographic constraints.
These workplace strategy changes will give rise to tertiary market bedroom communities. The West Coast has already seen an exodus from dense, expensive coastal cities into secondary and tertiary markets. The cost of living is more manageable, and employees can avoid the daily rat race of a morning and evening commute. As the workforce has greater autonomy over their work environment, these tertiary residential markets create a feeling of being remote but are close enough for employees to remain available. Residential and multifamily development that has historically drafted off MSAs and populous job centers will undergo a significant overhaul over the next few years.
Disruption to Traditional Real Estate Investing Strategies
Don't expect to see millions of square feet of office space go dark overnight. Commercial properties are historically slow to evolve. A piece of investment real estate is beholden to any in-place leases, which generally tie the property up for the lease term's duration. Additionally, the recession hasn’t hit industries that use offices as hard as other markets. But investors need to brace themselves for several changes to the traditional model for underwriting office properties.
First, investors need to be prepared to accept shorter-term, tenant favorable leases. Landlords must reposition their real estate to remain competitive with flexible coworking options. That means investors will need to offer bespoke, tenant-unique lease solutions. Initially, these short-term leases may impact office building valuations, but any value erosion can be offset by reducing lease perks offered by the landlord.
Another shift might be the need for landlords to outlay health and safety-focused space upfit dollars. The post-pandemic economy will demand a certain threshold of employee wellness and risk mitigation technology. CB Insights addresses some of the technological advancements that will help shape the future of the office space. Traditionally, significant upfit costs fall on the tenant, but in a future that necessitates these innovations, the landlord may end up having to foot the bill.
A Real Estate Advisor’s Role in Helping Craft Workplace Strategy
There is a common misconception that if you don’t specialize in a niche of real estate, you don't become an expert in any practice.
It’s true that in some cases, a specialist may be able to best assist with a specific investment or strategy need. More often than not, though, a specialist looks at the market’s needs through the lens of their experiences. Every problem becomes a nail that can inevitably be fixed with their hammer.
Instead of falling into the same trap that most businesses find themselves in, it's crucial to find an advisor with a breadth of experience beyond simple deal-making. Real value is created by carefully crafting a strategy based on a principal's needs, appetite for risk, unique circumstances, and desired future outcomes.
If you have questions about your business’s workplace strategy or how these trends may impact your investment property's positioning, let's chat.