Regardless of where you are in reopening, one point is clear: Office environments are going to look different from the layouts and protocols followed before the COVID-19 pandemic. Organizations will have several logistics to consider as they move through their reopening plans, including requests and questions from their employees and questions about office space modifications that they may need to work out with their landlord.
As tenant advisors, CBIZ Gibraltar Real Estate Services works with tenants to both negotiate and renegotiate leases, as well as to assess physical environments. The following represents some of the common questions we anticipate as organizations assess what the COVID-19 pandemic may mean for short- and long-term changes to their physical space needs.
Going Back to the Office
Some of the first considerations that will arise involve the accommodations that may be needed to get employees safely back into their office spaces.
What should employees consider when returning to the office?
There are a number of issues to consider. Tenants need to be thinking about how they will interact with their colleagues, and what their workspaces will look like. Leadership may also be addressing issues such as:
- Will there be shifts to eliminate spacing issues?
- How will spacing and social distancing be accommodated? In the short term, will everyone have a dedicated workspace?
There will be a need to understand the rules in the office for masks and sanitation and how communication will need to take place with colleagues who are working remotely. These communications will be some of the initial challenges that we will all need to work through.
How will safety information be communicated to employees?
Many employees may not feel comfortable that the threats related to COVID-19 have substantially subsided to return to shared working spaces. Organizations can help assuage concerns by proactively communicating the measures being put in place to minimize potential disease spread, including cleaning schedules, limitations placed on group meetings, physical changes to work environments to reduce density, and any policies on use of personal protective equipment, such as masks. Every company should have a written plan for this that is circulated to employees. Signage should also be posted as reminders of the safety measures put in place, such as the need to wear a mask in common areas. There should also be stations for hand disinfectants, and ample wipes for high touch areas.
What changes will the landlord make to help the building be safer from COVID-19 concerns?
Office buildings are typically shared by multiple tenants, and organizations should have a clear understanding from their landlord about changes made to the building’s common areas, including parking garages, lobbies, elevators, and staircases. For example, the number of people that can ride in the elevator at one time may be limited and proper spacing denoted by marks on the floor of the elevator to ensure adequate distancing. Landlords may also be monitoring the ingress and egress of people to maintain safer traffic patterns, enlisting the help of building security teams. These updates should also be communicated to your staff, whether from the landlord directly or through signage and communication from your operations team.
What challenges do the larger cities face?
Urban areas may have a longer timetable in getting employees back into the office due to the challenges involved in social distancing on mass transit systems. If your organization’s employees rely on mass transit to get to and from the office, they may be waiting until disease threats subside a little more before undertaking that commute. In addition, traffic could be significantly more congested in major markets if more individuals are using personal transit in the short term.
Long-Term Culture Changes
What do you think the timetable will be for all employees to get back to work in office settings?
It is anticipated that revenue and productivity at some point will start to fade. Some employers may say “we’re spending money every month on rent for space sitting vacant so employees need to get back to work.” That said, it is expected that 75% of employees will be back by year-end, with the remainder right after January 1, 2021.
How realistic is a permanent work remote environment for employers/employees?
Except for a minimal number, it is anticipated that revenue growth will be difficult, so as a result, the anticipation is that it will be limited. Notwithstanding, there are many that predict a more significant percentage. Companies will likely find it extremely challenging to build (or sustain) a culture, mentoring, and collaboration without office space. A permanent remote work environment for all employees is not sustainable for most businesses. Some may find a minimal number of employees end up working remotely, but realistically the expectation is that between 10 and 20% of the workforce may be on a work-from-home basis.
What is the formula for remote work’s impact on space needs?
Architects anticipate that a formula to use would be to take the percentage of the “in office” workforce reduction, and multiply it by 60%. So, a 20% in office reduction would result in taking 12% less office space. It is not an even offset, particularly when taking in to account some additional spacing needs in the open workspace areas.
What do you think is the driving factor for remote working beyond the virus?
Many employees feel as if their productivity is on par with working in the office, and that may be true for some. Another case to be made would be that employees like not having to commute, and having more flexibility with their time. For employers, the real motivation is saving rent dollars. Two very different objectives.
Financial Implications & Market Perspective for the Post COVID-19 Environment
What are the financial implications of COVID-19 on the Commercial Real Estate sector?
The Commercial Real Estate sector relies on building occupancy to gauge its demand, so in the short-term, the COVID-19 pandemic has been disruptive to both tenants and landlords. Disruption to rent payments or modifications made to leasing arrangements also have hurt the CRE financial performance. How quickly the overall economy recovers will have a direct impact on CRE, as will the pace at which employees come back to work.
What impact do you expect the weakness from the market will have on lease economics?
Leases for office space have generally operated with inelastic demand; organizations leased space that could accommodate their programmed headcount and space needs. With more employers considering a hybrid remote work arrangement, the demand for space becomes more elastic. This could have an impact on lease economics because it gives the tenant advantages and flexibility it may not have had prior to the COVID-19 pandemic. This could, in some cases, reduce the average cost of leases, as organizations will be more willing to forgo additional space in pursuit of a better price for their core square footage needs, and remote work remaining employees.
It is anticipated that there will be more lease concessions because landlords may have to a reach a little further to attract the ideal tenant. Rent prices can only dip so far (5-7%) before they impact the building’s valuation or the landlord’s lender arrangements. In addition, it anticipated that there will be a 10% increase in tenant improvement allowances and a 20% increase in abatement over the next 12-18 months.
Do you expect to see companies moving from Class B space to Class A buildings to ensure touchless technology and other tools that enhance cleanliness and safety?
It is unlikely that a mass migration to Class A buildings will occur given the cost associated with that type of upgrade. Class B buildings will provide sufficient safety measures over the coming months to keep the workforce safe while we all wait for a potential COVID vaccine. Notwithstanding, as mentioned previously, some tenants may take less space as a result of a partial remote work arrangement and may opt to move from a Class B building to a Class A building.
What is a blend and extend option? Who should be considering this option?
For tenants with between 1 to 3 years remaining on their lease, a better option than subleasing surplus space may be to consider a new negotiation with the landlord that incorporates a giveback of excess space in exchange for an extension of term, what’s considered a “blend and extend” option. It’s a benefit for the tenant, and for the landlord, it helps them avoid having to compete with building tenants willing to unload their space at 50% discounts. To make this work, a tenant needs to understand that a longer term commitment would be required.
Next Steps
Only time will tell the extent of which the COVID-19 pandemic affects office space in the long term. What is clear is that there will be a new normal when it comes to how office space is being utilized, from density reductions, to technology that permits interaction that is more touchless.
We have services that can help make the tenant migration to the post COVID-19 environment easier and would be happy to help. To learn more, contact us or check out some of our additional resources below.
Additional Resources
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CBIZ Gibraltar Real Estate Services is a national, conflict-free tenant advisory team providing lease negotiation and workplace solutions for a range of companies. CBIZ Gibraltar Real Estate Services is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).