The future of work: In a hybrid world, office space cuts are coming

[[440952]]

As the pandemic continues to spread, many companies around the world have delayed their full return to the workplace and are trying to figure out what the future of work will look like, which will further exacerbate the problem of office oversupply, especially in the United States.

Corporate office leasing remains below pre-pandemic levels, according to JLL, a commercial real estate and investment management services firm. Data shows that while third-quarter leasing volumes increased 39% year-over-year, they are still 25% below the same period in 2019.

In fact, the U.S. has lost 138.4 million square feet of office space since March 2020, when COVID-19 was officially declared a global pandemic. That’s 34% more than the 103 million square feet of vacant office space that emerged during the Great Recession of 2007 to 2010, according to global commercial real estate brokerage Cushman & Wakefield.

[Real estate occupancy rates fell sharply in 2020 and 2021]

Many companies thought they would be able to return to work in full by mid-2021, but the reality has shattered their expectations. Last week, for example, Apple told employees that it would delay its return to the office until February 2022. This is not the first time the company has delayed its return to work, nor is it the only one. Many companies have often postponed their return to work, or even abandoned office space altogether.

In August, Seattle-based REI announced it was trying to sell its new, unused headquarters; meanwhile, the company now envisions a more decentralized, multi-location approach to office space. Similarly, Zillow Group announced this summer that it would offer about 90% of its 5,400 employees the option to work from home (at least part-time) for the foreseeable future.

Zillow said in a company blog post, "We have historically discouraged employees from working from home because we prefer face-to-face and in-office collaboration to virtual communication. However, during the pandemic, our old preferences have been completely shattered."

Changing scenes

Raj Krishnamurthy, CEO of workplace technology company Freespace, said that in a hybrid work environment, office space is less necessary and companies often don’t consider renewing their leases. Data returned by Freespace’s building sensors shows that many smaller regional/suburban offices are not choosing to renew their leases.

According to Moody's Analytics, a consulting firm, only one in 20 office buildings in the United States had an occupancy rate of more than 10% in early May, and just last month, the average occupancy rate was only 16%. Looking ahead to 2022, it is expected that about one in five offices will be vacant.

This doesn’t mean the office real estate market is dead, though. This month, the average occupancy rate for the 10 cities on Kastle System’s Return to Work Barometer rose to 39%—up 1.2% in a month. That’s the highest rate since March 2020; and every city on the Return to Work Barometer saw an increase in occupancy.

Kastle Systems is a managed security provider to more than 10,000 companies worldwide; it uses employee card swipe data to determine workplace occupancy.

The figures show that companies around the world are struggling to figure out what an agile workplace looks like, and how hybrid offices can work. Occupancy data from anonymous workplace sensors at Freespace showed that the proportion of businesses with "employees returning to the office at least a few days a week" rose from 5% in May to 47% in October.

Freespace, which deals primarily with building occupants rather than owners, has also found that use of collaborative spaces has risen – from 10% in September to 13% in October – highlighting the shift towards “shared spaces”.

Subletting is becoming more popular

Krishnamurthy said the lower renewal rates seen now could be due to corporate consolidation of office space. Fewer renewals could lead to a glut of space.

Krishnamurthy added, “Clients who used to have 60% peak occupancy are now running less than 40% peak occupancy. If you operate multiple floors, it makes sense to consolidate them into fewer floors to create a sense of fullness. Ultimately, if occupancy patterns remain stable, downsizing or subleasing will be the way to go.”

As the workforce becomes more flexible, more companies are subleasing their office space, often for shorter periods, according to a report from Cushman & Wakefield, which shows that in major markets, subleasing office space can be 10% to 50% cheaper than leasing.

The report also noted that while the amount of space being subleased declined slightly in the third quarter — down 0.8 percent — there is still a significant amount of vacant space.

Evolving Office

Juliana Beauvais, research manager for IDC's Enterprise Asset Management and Smart Facilities Practice, said that despite this, offices are not dead, because some jobs simply cannot be done remotely, and on-site work has irreplaceable benefits and experiences, but they will be redesigned in the future.

When the pandemic is finally over, nearly 70% of employees will primarily work in company-operated physical locations, including offices, branches, stores, warehouses, factories, hospitals or schools, according to IDC's Future Enterprise Resilience and Spending Survey conducted in July.

[[440953]]

Team Pods rooms are designed to be highly configurable spaces for hybrid workplaces

As employees increasingly enjoy remote work, companies adopting hybrid work environments are looking for smaller footprints and more flexible spaces to accommodate the changing number of employees working on-site.

Google, for example, is gradually rolling out highly adaptable rooms called “Team Pods” that have all the elements of a traditional office space but can be easily reconfigured with furniture and partitions to support focused work, collaboration, or both, depending on the team’s needs.

Additionally, Google has created "Campfire" meeting rooms, which, as the name suggests, allow multiple people to sit in a semicircular space and share multiple monitors.

[[440954]]

Google's "Campfire" room layout

A Google spokesperson said, “We are reconfiguring some office layouts to try out new workplace concepts. We are starting with a small number of offices first, and then gradually expanding these solutions more broadly across Google offices around the world based on what we learn most effective in the process.”

Google's pilot offices include the San Francisco Bay Area, New York City, London and Dublin, among other locations.

Where weather and local conditions permit, Google will also test a new type of activity-based outdoor space, such as one called Camp Charleston in Mountain View, California.

[[440955]]

Camp Charleston in Mountain View, California

Microsoft is also remodeling its offices, installing cameras and screens on the walls to accommodate virtual meetings. This setup allows remote workers to maintain eye contact with their office colleagues as if they were all in person.

A Freespace spokesperson said meeting room usage is now at its highest level since 2019, proving that when people come into the office, more face-to-face meetings are taking place.

It’s all about collaboration and focused execution of advanced skills, said Amy Loomis, research director for IDC’s Worldwide Future of Work market research service. For example, employees can more easily handle work remotely, but strategizing a product marketing plan requires collaboration, which requires in-person meetings.

“Each company will decide for itself whether it needs more or less office space based on hybrid work policies, employee geography, and actual space usage,” Beauvais said. “It’s clear that most organizations, regardless of footprint, will transform the offices they own or occupy to meet the changing demands of a digital world.”

Pursuit of high-end space

While commercial real estate remains a buyer’s market, with most landlords eager to attract tenants, lease prices for prime buildings have edged up, making them attractive to companies seeking state-of-the-art facilities for their mixed workforces.

This trend is largely driven by tenants’ “striving for quality,” meaning businesses are willing to pay higher rents for higher-quality, greener buildings that incorporate the latest technology.

“Quality is really a major focus for our tenants,” explains Freespace’s Krishnamurthy. “In fact, work culture is becoming a key reason why people are switching jobs. Employers are offering flexible working models and differentiated workplaces to not only attract new talent but also retain existing employees.”

According to an IDC survey in October, 88% of companies have already invested or are planning to invest in updating physical spaces to make them more suitable for flexible working. The vast majority of investment areas are concentrated in four trends that we have seen for many years (and that were spurred by the pandemic): smart meeting room management, employee health, contactless control, and energy consumption.

Many potential renters want a “concierge” experience in their new offices, where employees can use a mobile app to enter the building, check in via that mobile device, and be directed to their meeting location via an app or lobby wall display. They can also digitally let others know if they want to postpone or adjust a meeting time and location.

If an employee needs to leave a meeting to pick up their child, they can also seamlessly transfer the video conference to their mobile device and continue the discussion while driving.

“Green credentials,” or buildings that use less energy and are otherwise more environmentally friendly and healthier for employees, are equally important. In fact, research shows that environmentally sound buildings have a direct impact on productivity.

And this “green” trend is likely to accelerate. Large real estate asset managers such as BlackRock and Brookfield have pledged to achieve net zero emissions across their assets by 2050.

A Brookfield spokesperson said: “Creating an innovative, sustainable and attractive work environment has long been a top priority for us, and this has become even more important during the pandemic. The world’s leading companies and their employees are increasingly asking us to explore and implement innovative sustainable practices and technological changes, and we are continuously taking action to achieve this.”

[[440956]]

Brookfield launches high-end office building

According to a white paper released by BlackRock, health and safety are more important to tenants than ever before, and landlords who can effectively work with tenants and meet their needs are more popular.

Factors such as indoor air quality, automatic doors and other touchless equipment/devices, frequency of cleaning, and floor designs that effectively accommodate social distancing will be important.

Office buildings with green credentials have performed well in rents; in the top 10 U.S. markets, such buildings are generally priced about 2.4% to 4% higher per square foot, according to BlackRock.

In the future, health and wellness certifications (such as FitWel and WELL) may become more of a market standard rather than an add-on. In addition, capital expenditure plans will need to be implemented to attract desirable future tenants, which is where value-added capital can come into play.

For example, buildings with better ventilation systems and lighting conditions are attracting more tenants. A study published in September by Harvard University’s T.H. Chan Medical School showed that ventilation has a significant impact on cognitive test performance.

The power of green certification is not without basis, as a growing body of research shows that people who live in healthy, green buildings are more productive because workers get sick less often and are more alert at work.