While the pandemic has created some uncertainty in some property types in the US, interesting patterns, new ideas, and potential opportunities are emerging in others. As we continue to research the long term effects of the pandemic on the economy and society, we came across a noteworthy piece in Harvard Business Review, written by Peter Bacevice, PhD, Jack Mack, Pantea Tehrani, and Matt Treibner (all appear to be colleagues at the innovative and visionary architectural and design firm HLW). The piece (we have included the link at the end of this post) is titled “Reimagining the Urban Office” and we found it to be highly relevant to internal discussions in recent months regarding our perspective on the future role of office space in our city centers (and society) and how it may shape our office investment strategy 2021. While this is a more conceptual Sector Watch than others, we remain eager to share our perspective (and this article) with you and hope you find it interesting.
Learning From Designers
Real estate is not exempt from innovation and disruption. Long-term investing in real estate must now extend beyond the assessment of a location and the valuation of cash flows. At this point, one cannot ignore societal or broad economic shifts (demand and supply) sparked by the pandemic and their implications on how we work and live. These “post-pandemic” trends can have a profound impact on supply, demand, and residual value. Furthermore, if we truly want to understand potential trends and uncover opportunity, it is important for us to understand what office users are thinking today and what innovations could have a direct impact on how they use and value office space in the short and long term. Brokers are not the only source of information. We believe designers and architects are exploring exciting ideas not just out of some theoretical or academic curiosity, but because clients are asking them to do so. So, today’s questions or ideas on how to reimagine office space may become tomorrow’s office requirements.
Office Is Not Dead
In a recent Sector Watch Report we shared earlier this year titled “How COVID-19 Is Shaping Opportunities, Risks, and Perceptions in the Office Sector”, we offered a hypothesis: While the pandemic has altered our collective use and perception of the importance of office space, it has not ended our need for it – on the contrary, it has sparked (or accelerated) an entirely new way to use, value, and design it. Which is why we found this article so interesting and worth sharing. As the authors of the article put it: “The office is not going to disappear, but it will require a fresh, new approach. People will still need places where they can come together, connect, build relationships, and develop their careers.“ We tend to agree. When one thinks about onboarding new employees and integrating them into the corporate culture, it is difficult to imagine it will be done exclusively through Zoom.
From Headquarters to Central Hub
Just as in so many other aspects of our life, the pandemic didn’t necessarily change everything, but it accelerated everything’s implementation and the rate of change. The decentralized workplace was already happening prior to the pandemic. People were working from home a few days each week; team mates were living in different cities and collaborating virtually; smaller firms were utilizing a vast network of shared/coworking space.
But yet, some things did accelerate. There is no denying that while initially working from home proved to be difficult for some, some found it came with a unique set of advantages. As noted in the article: “In fact, many individual professionals recognize the long-term benefits of home-based work. Our recent study of a 700-person corporate headquarters revealed that 82% of employees would like to retain a work-from-home option when things return to normal. Company leaders also recognize the potential benefits, and many agree that some degree of remote working will likely remain as a long-term part of their workplace strategies.” This is in line with other statistics we have come across during our research.
In short, work from home is here to stay and what was an occasional occurrence eight months ago is now a permanent fixture.
So, what could this mean for office space demand? After seeing the benefits of working from home, will people really want to return the days hours of commuting five days a week? Did the two colleagues from different divisions working on different floors in the same building see each other any less over the past 4 months? And just as we asked in previous posts, whill firms require less space because of permanent work from home policies, or more space to maintain better social distancing?
One hypothesis that is forming internally, and reinforced by this excellent article, is that we may see a hub and spoke network of offices vs firms returning to the pre-pandemic “headquarters office” model. What would this look like? We are not sure just yet. Maybe a firm that may have had one large office in Midtown Manhattan, may take on a smaller NYC office, and expand into a series of smaller hub offices in surrounding Long Island, Connecticut, New Jersey and Westchester. Teammates will still gather; commute times will be minimized; an interpersonal corporate culture and community can be maintained. It seems logical, and based on the results of surveys like the one in the article, preferred. Furthermore, as the piece goes on to mention, there would be other benefits of the “distributed nodes” (i.e continuity during natural disasters, putting workers closer to customers, a diversity of organizations under one roof developing relationships “within and among organizations”, service disruptions can be isolated, etc.). Makes sense (in a year where it seems very little does).
There are so many interesting thoughts and ideas in this piece we will not list them all, and simply recommend you read it for yourself. That said, this content-rich piece is precisely the kind of innovative perspective we all need to incorporate into our thinking when it comes to understanding the potential trends in post-pandemic office demand. From its take on the advantages suburban office may have over urban office spaces as it relates to adaptive reuse, to some ideas on post-pandemic reconfigurations of office floorplates, it is a worthy read. While we may not agree with every point, we do agree (as we have pointed out in previous posts) suburban/non-CBD office space may undergo a bit of a renaissance to become a core piece of a firm’s “post-pandemic” culture of innovation and collaboration.
The range of possibilities included in this intriguing piece, as well as through other research, has us excited for what is in store. Just as we have previously discussed the possibility of excess retail space becoming last-mile distribution or parcel locker space (in fact, there is news that Amazon is looking to convert large vacant/defunct retail centers into hubs), it is equally possible that this decentralization of large office concentrations could be what absorbs some of the the well-located retail space that suffered through the pandemic. Furthermore, we hope large firms seize the opportunity to locate some of their nodes in economically challenged areas (imagine that for a moment) as a vehicle to spark much-needed development and opportunity.
Implications & Observations
Of course, our outlook on the office sector remains cautious. There are several fundamental economic indicators that point to a difficult road ahead in the office sector. But we are also excited to see what significant changes and creative solutions are around the corner. The disruption caused by the pandemic will also drive innovation on several fronts and understanding trends beyond the standard set of real estate statistics can play a key role in asking the right questions, understanding underwriting assumptions, and shaping an office investment strategy. The questions will now place more emphasis on a tenant’s total regional footprint, expirations in other spaces, and proximity to its employee and client base. The underwriting assumptions must now also focus on a wider scope of competitive space and alternatives. The strategy will have to consider total portfolio concentration of large city center and headquarters leases, potential for building reconfigurations to accommodate social distancing, and the potential for adaptive reuse of a building within the portfolio over the long term.
Many questions remain and more research is required. But when it comes to our research, we are always looking for a fresh perspective and pieces that force us to look at opportunity and potential from a wider lens. This fascinating article did exactly that, so we just wanted to share it with our community.
As always, thank you for your time and we hope this post finds you and your loved ones happy and well. If you are interested in staying connected, please be sure to follow us on social media or visit our website at eastalliace.us
The EastAlliance Family
The article referenced in this post can be found here.