The New Era Of Office: Landlords And Tenants Are Dating, Not Getting Married
In the wake of the global coronavirus pandemic, returning office users resemble skeptical daters who are wary of the burdens of a relationship — onerous lease commitments, expensive tenant improvements and buildings where landlords are not proactively working with lessees to create the best on-site corporate cultures.
At the root of this skepticism is the reality that many office users are still reeling from the pandemic, Yardi Director of Global Solutions Arjun Rao said after his real estate tech solutions firm conducted a survey of office tenants on the subject.
“One thing I found interesting is that two-thirds [of those surveyed] either had a significant revenue decrease or think they will, and a third actually have had a revenue decrease of 25%,” Rao said while speaking at Bisnow's Trends Shaping the Future of Office webinar Thursday. "It's that uncertainty that's causing people to feel less sure about what they are going to do with their real estate.”
The office market held stable during the early months of the pandemic but started to feel some pressure last month, he added.
“Occupancy is around 86% nationwide,” Rao noted. “It was generally flat up until a month and a half ago. In the last month, it dropped 0.3%, which is a large monthly drop. What we are finding is that for many leasings that are expiring, generally what’s happening is the tenants are holding onto the space, and they are not wanting to make any rash decisions one way or another. Similarly, on the other side, owners also kind of have a wait-and-see view.”
Because of all this uncertainty, the future of office post-pandemic will be one where landlords are expected to offer more speculative space with amenities built in, from green areas to air filtration systems, siloed workspaces with doors and quality common areas.
At the same time, landlords will be expected to offer more tenants flexible lease terms and concessions, real estate experts said.
“A generation ago, people had different relationships with their employers than they do now,” Boxer Property President Justin Segal said.
Much like employees looking for the best employer of the moment to enrich their lives and pocketbooks, office tenants after the pandemic are going to be looking for landlords who offer shorter-term, more beneficial lease commitments without the worry of infectious diseases or at least a setup that appears to be a strong deterrent to disease outbreaks.
“The relationship between the tenant and the property can be seen going in that direction,” Segal said. “[Tenants are saying,] We are not going and signing a long-term lease. I am going to go where the talent is, this is going to be a shorter relationship. I want you to entertain me and take care of my needs, and if you're not, I am going to go somewhere else, to another market or property where I can find what we are looking for. If we think about this, we are dating instead of getting married as landlords and tenants.”
The pandemic hastened this trend with certain parts of the office sector happy to stay home or contemplate more flexible workspace options. Segal said to survive, landlords need to work on how to get the right plans in place for tenants and then work with their lenders and investors on how to get it done financially. In other words, the tenant is now in the driver's seat.
One of the tenants most likely to run is the long-term tech tenant that has the most experience working remotely and does so with ease.
“Tech tenants are definitely on the offensive, they are thinking it out,” Endeavor Real Estate principal Becky Heston said. “More traditional users, like law firms, seem to be analyzing what does their future look like with regard to space utilization. I think it's a more difficult question for a traditional user.”
The traditional office users, from real estate firms to legal offices, are generally keeping office in play right now.
“Traditional office users, some of them never left, and those are the folks that we are still seeing coming into the building every day,” Stream Realty Partners Managing Director Amanda Coupe said.
“I would say probably overall in the office sector, our building occupancy day-to-day as far as headcount is probably south of 25% and ebbing and flowing depending on what month and what time of year,” Coupe said.
While these more traditional firms are likely to still value office going forward, they too may be looking to make changes, Heston said.
She expects law firms and other tenants that rely on traditional layouts involving cubicles and shared environments to contemplate a different future after the pandemic.
With many of these firms in downtown areas, the numbers already show a reticence among some lessees about returning.
“Our buildings downtown, which have a lot of tech tenants that have really pivoted well towards work remotely, remain at about 15% occupancy,” Heston said.