The Shift To Remote Work Could Encourage More Suburban Satellite Offices
The days of most employees commuting to a regular office five days a week could be over. Over the past two months, many businesses have been forced to have their employees work from home, subsequently learning that technology can allow them to conduct business without a large office footprint.
A combination of a public health crisis and widespread economic disruption has many firms re-evaluating their business operations. In Houston, where the coronavirus pandemic has struck at the same time as an energy downturn, the office industry is grappling with an unclear future and two major questions: How will office usage shift, and what — or where — will it shift to?
Traditionally, office tenants have sought to find the one, perfect location for their business.
Brokerages often perform commute analyses for office clients, to help them understand where the bulk of employees live and how to situate an office in an accessible location. In an expansive city like Houston, the challenge is finding an office location that can cater to employees living anywhere from The Woodlands to Sugar Land, Galveston to Katy.
JLL Vice President Bryant Lach noted that if an estimated commute time is more than 45 minutes, attracting and retaining employees can become difficult. As a result, central office submarkets like Greenway Plaza, the Galleria and Downtown Houston are attractive to employers who want to draw talent from all over Houston, while also targeting a key audience: young talent living inside the 610 loop.
“Houston is so sprawling that to move out in any of those directions, you also face the potential of alienating folks who might live elsewhere, which is why Downtown and the Galleria are so popular here,” NAI Partners Senior Associate Joe Bright said.
“Unless you feel comfortable that the majority of your employees live in closer proximity to one of those suburban areas, you're going to make it harder on others.”
But with companies seeing that work still gets done when everyone isn’t in the same office, more employers could abandon the idea of one centralized office and instead set up multiple smaller offices.
“Part of that piece that we haven't really discussed until now is the satellite office location, it's really been, ‘let's find the perfect location, it's close to the executives, it's close to talent, and then we'll bring in some of those people right on the outskirts,’” Lach said.
“I do think that we may see more satellite offices — in The Woodlands, in the Energy Corridor, Sugar Land — to be closer to employees, but I still think that Downtown, inside the loop market is going to turn out really well.”
Satellite offices are common among the biggest office users — though even giants like ExxonMobil have over the last real estate cycle increasingly consolidated a slew of branch offices into one location that offered additional amenities and underscored the corporate culture — but that could trickle down to smaller tenants who typically occupy 50K SF or less, Lach said.
Instead of one central location, a company could opt for two or three small offices close to employee hot spots around Houston, where workers can still come in a few days a week to collaborate and engage with their peers.
If satellite offices do become popular, Lach doesn’t think it will be due to companies prioritizing social distancing.
“I don't think that it's going to be specifically driven for health reasons, I think it will be more driven towards, employees have gotten used to being at home, not having to commute, and enjoying that and saving some of the money when it comes to gas and the commute time that they save,” Lach said.
A client survey by NAI Partners released May 21 found that 35.7% of respondents are considering downsizing their office space. Another 14.3% of respondents are considering relocating their office space in the short term.
The survey also found that 57.1% of respondents are considering more flexible working conditions for employees in the future, while 38.1% will continue to allow employees to work from home, regardless of exterior circumstances.
Bright said he has not seen a huge influx of people looking to shift entirely to remote work, but some clients are re-evaluating the way they use their office space.
“Those are clients that are a little bit more dense, and so they had traditionally been open-concept, benching lower square footage per employee,” Bright said. “Those companies are having more internal conversations about how they want to use their office moving forward.”
Lach said JLL has been working with clients to re-evaluate their office needs, and he has seen interest in downsizing office footprints. However, companies still see the value in maintaining an office for culture and collaboration.
“With technology, remote working does work, but again, it's not going to fully replace the office,” Lach said.
Companies that decide they do want to open new offices may be pleased with their options — with so little leasing activity and so much empty space, it is a tenant’s market.
Houston’s office market vacancy rate was about 20% in Q1, according to Colliers International. That is an increase of 60 basis points from the same quarter a year ago. Those figures don’t account for any changes since the end of March, when coronavirus-related economic disruption intensified.
With so much office vacancy around the city, landlords are employing aggressive incentive strategies to attract tenants. Lach said that on average, the tenant improvement allowance has risen by 10%, rent abatements have increased between one and three months and rental rates are slightly decreasing.
Though transactions have slowed, Bright said tenants who are in a good position are looking for better deals on office space.
“I think those that are able to be in the process of analyzing new transactions certainly want to evaluate places where they can be opportunistic and take advantage of how soft the market is,” Bright said.
Not every business is in a position to look for a better deal. The lack of certainty has caused many tenants to pivot to short-term leases and extensions, until their business can get the full picture of where they stand.
“We are seeing a number of folks kick the can, so to speak, and even clients who are on the verge of signing leases to move, then redirect to one-year extensions in place,” Bright said.
There is one other factor that will likely continue to influence where an office might relocate: where the boss lives. Many prospective office clients will ask brokerages to conduct commute analyses for their workforce, but then ultimately choose an office location close to the homes of senior executives.
“It's probably more common than you think,” Bright said. “We'll do the analysis of where employees live and all that, and then the decision, a lot of times, ultimately comes down to where the boss lives.”