No, You Won’t See A Major Shift to Work from Home
But The Way We Use Office Space May Change
“Is the traditional office dead as we know it?”
That seems to be the question that everyone has been asking over the last 90 days.
With major companies like Twitter and Facebook announcing that their employees will continue to work remotely for the foreseeable future, it certainly seems to be a valid question - “will these businesses and their employees return to an office environment?”
Here’s What’s Happened Over the Last 90 Days
Leasing activity slowed significantly in the few weeks following the shut downs across the country.
In fact, our team handled less than 5% of the activity that we were seeing in the weeks prior.
This halt does make sense, though.
If businesses can’t see customers and employees cannot come into the office, why bother leasing space?
However, according to Google Trends, “office space for rent” is an increasingly popular search term since it dipped in early March. In fact, it’s now climbed back in the last 30 days to where it was in January / February of this year.
Let’s Talk About The Data
One thing to keep in mind is that the country, and Nashville, especially, had historically low vacancy rates going into the shutdowns.
Nashville’s historic average office vacancy sits at around 10% and peaked at just under 14% in 2010 during the height of the economic downturn.
So, considering our current vacancy rate of around 6% at the moment, vacancy would have to nearly double before we even hit our historic average, let alone come anywhere near an office market crisis.
So, we’re at least not hitting a breaking point for the office market.
Vacancy Rates Will Increase in The Short Term
You don’t have to be a commercial real estate analyst to expect vacancy to increase in the short term.
These vacancies will largely be attributed to businesses that were unable to weather the storm, not necessarily because people are choosing to work from home. Most commercial leases run between 3-5 years, anyway, so these quick, short-term decisions aren’t really possible for them to make.
Activity Slows, but There’s Confidence from Business Owners
Businesses that were on the search for space and those that have leases coming to an end may decide to put leasing on pause, which will lead to these increases in vacancy.
However, we have retained 90%+ of the tenants that we had at our properties going into the shutdowns and have still signed leases and moved in a few more businesses.
Activity may have slowed, but there is still confidence in the market.
Asking Rents Hold Strong
Asking rates have not seemed to drop.
Though, many business owners are certainly trying to negotiate on rates.
Landlords seem to be confident in the current state of the market, and since we haven’t seen a major uptick in vacancies yet, that confidence will likely last for quite some time.
Concessions on The Rise
However, rental rates refusing to drop does not mean that landlords are not offering better concession packages.
Property owners are working with the right tenants as much as they can - in more ways than they likely would have done before.
We’re seeing:
longer rent abatement or free rent periods
more negotiation room on other aspects of leases
shorter-term leases are more acceptable now than they were previously
and tenant improvement allowances or delivery conditions may be adjusted
Rising concessions has created an opportunity for business owners to negotiate slightly better deals than they would have been able to do before.
Current Leases Also Receive Concessions
For tenants that were already under lease, we have seen a willingness to help from commercial real estate investors.
Where possible, rent has been deferred and most landlords are adding those paused months on to the end of the lease, increasing the term for the tenant so the landlords can justify taking a hit now.
The fact that business owners are willing to increase the length of their lease shows their desire to stay and continue operations out of their locations.
Working Remotely And The Future of Office Space
So, now that we have a bit of background on where the office market was earlier this year and what we’ve experienced over the last 3 months, let’s talk about the future of office space.
We know everything will be different, but what are the changes that will take place?
How much of an impact will the trend of remote working or working from home affect the office market?
The Rise of Working Remotely
Work from home seems to be all you hear nowadays.
And, well, until recently it was all that anyone could do, considering the government shutdowns for Coronavirus.
Businesses had to quickly pivot to a work from home model to keep their employees active and productive or else face furloughs and layoffs.
Will this model continue after the virus has passed, though?
Pros of Remote Working
There are some rather attractive benefits to remote working.
Allowing your workforce to work from anywhere can sometimes increase the quality of life for employees.
Work from home cuts out commutes, which can take up to an hour or more both ways here in Nashville, and allows your workforce to take care of their family’s needs or attend events without going through a formal request process.
As long as they get the work done, it doesn’t matter if they’re working at 9am or 9pm.
There is also something to be said about shaking up your work environment and the creativity that flows from new surroundings.
Not to mention the cost savings of renting less office space, if any at all.
Pros of Working in An Office
I feel there are far more benefits to a business working from an office, however.
And sure - I may be biased here.
After all, we do lease office space for a living - but I am also a business owner with a team.
The synergy that comes from working in that environment, where you can quickly and easily collaborate with the team, bounce ideas, and build a culture isn’t feasible in a work from home environment.
In fact, my team was asking me when they would be able to return to the office again - they felt less productive at home where they could be easily distracted by family, pets, TV, and chores.
And if a professional image is important in your industry, as it is for most, it’s next to impossible to achieve that without a home base.
Productivity ≠ Productivity
What an employee sees as productive and what a company sees as productive can be two very different things.
In a work from home environment, employees “feel” that they are more productive because they can work without having to get up as early, don professional attire, and drive to the office.
But are they really more “productive” for the company?
I posed this question to one of my contemporaries, whose team had told him that they felt more productive working from home. They had even gone as far as to say that lunch only took them 20 minutes, since they could just open the fridge, and they “got to work” earlier since they didn’t have to commute.
So, the team felt that they were working more, but the business owner had noticed a drop in the key performance indicators by which he measures his team.
Businesses Will Still Need Physical Offices
Sure, technology is pretty incredible, and we now know that in a worst-case scenario, we can rely on conference calls and zoom meetings, but nothing will replace those in person brainstorming sessions or meetings.
There are certain back of house operations that businesses will likely learn that they can outsource or that are already geared to allow employees to work from home.
However, most other positions thrive in a collaborative work environment.
So, some companies may end up re-leasing less office space, since they may have fewer overall employees working there on a day-to-day basis, but they will still need an office.
Work Environment is Important to Employees
High quality talent also appreciates high-quality work environments.
Sales reps often thrive on competition with their fellow sales reps and when you see what everyone else in the office is doing, it often pushes you to work harder towards your goals.
It is tough to attract high-quality talent when your company doesn’t seem established enough to hold a centralized location or one that doesn’t fit the projected company image.
Final Thoughts
While there will certainly be some businesses that will choose to move towards this remote work model, it’s not really ideal for the majority of workplaces.
This shift could also affect the trend of open floor plan office spaces. With businesses becoming more conscientious about the proximity of their workforce, private workspace and offices may become more desirable again.
Another interesting point to keep in mind is that while these businesses may have fewer employees on site, most are changing up their floor plans to spread those employees out further, meaning that the square foot per employee could likely stay the same even with a decrease in employees.
Keep an eye out for changes to:
Office layouts
Floor plans
Employee work schedules
Sanitation protocol
About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
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