A year and a half after many office workers were sent home due to the COVID-19 pandemic, executives face big questions about how much space is truly needed. In Cushman & Wakefield’s August 2021 brief entitled “Office Tour Activity is Surging,” they have examined both the latest tour activity and new leasing data to determine implications for future office space demand.
At the current pace, the U.S. will return to pre-pandemic peak levels of office employment sometime in the first quarter of 2022, which is a little more than two years to reach full recovery. For context, it took six years for office employment to fully recover from the Great Financial Crisis. There also seems to be a trend of businesses signing longer-term leases, which can be interpreted as a sign of confidence in the long-term future of the office. Over 75% of new leases signed in the first half of 2021 have been for more than four years, and one-fourth have been for 10+ years, percentages consistent with pre-pandemic norms. Leasing activity notably improved in Q2 2021. New leasing totals were up 18% from the first quarter of the year, and up 28% from Q2 2020. The office recovery is clearly going to take time to complete. But unlike this time a year ago, we are now observing clear indications that demand for office space is forming beneath the surface and tour activity will remain a key indicator to watch on the road to recovery.
A recent PwC survey indicated that almost all companies surveyed expect to be back on their premises and able to support 50% capacity by the end of 2021. Companies are making their own plans about if and when to go back to the office and by what proportion. There is no set template. At the same time, the pandemic is accelerating an outward migration of knowledge workers from New York and California to less-expensive locales. Raleigh, NC and Austin, TX, the top real estate markets at the start of 2021, are among the boomtowns attracting more than their share of young workers. Several recent high-profile corporate relocation announcements suggest that some employees are inclined to follow this migration.
CBRE recently issued their Q2 2021 “office rent tracker” which highlighted a 34% increase in leasing activity in the previous three quarters. The primary markets of Los Angeles, New York and Washington, D.C. have experienced the largest declines in asking rents year-over-year due to rising vacancy. Other markets like Atlanta and Dallas are proving to be relatively resilient to vacancy increases and are expected to recover more quickly because of their high-growth, lower-cost dynamics. The moderating deterioration of overall office metrics is further evidence of an increase in positive sentiment by occupiers since vaccinations for COVID-19 became readily available earlier this year.
Executives still highly value physical offices. Most executives (68%) believe that people should be in the office at least three days a week to maintain a distinctive company culture, once the pandemic is no longer a concern. Moreover, 65% believe the office is “very important” to increasing employee productivity, while over half also consider the office very important for employee collaboration, providing spaces to meet with clients and enabling company culture.
Recent findings suggest that more than a few companies are taking up the opportunity to get creative with the workspace over the next couple years. The goal is to make visits to the office an experience that enhances relationships and the company culture. Actions are likely to include improvement to office décor and an increase in collaborative hubs, including bringing back some private offices or quiet spaces in a deliberate move away from cubicles and open floor plans. Companies realize that some employees need or prefer having a place to go to work as well as a place where they can build relationships.
PwC’s most recent report on “Emerging Trends in Real Estate,” showed that a majority of owners, investors and other property specialists believe that as a result of social distancing needs, office tenants, will require more square feet per worker that what was required pre-COVID-19. Space needs will now be dictated by the number of workers who will be in the office each day and how much space will be required to allow them to be productive and still meet any health safety concerns.
A recent CBRE report on “Real Estate Strategy Reset” emphasizes that many businesses increasingly report that remote and home-based work arrangements are taking a toll on team-based work, such as creative ideation, innovation pipeline development, impromptu conversations and social connections – all of which are best achieved in person. A team-based workplace design concept allows employees to engage in the office when they primarily need to collaborate with their team on a specific project or task. They report to a “campsite” shared with their project team, with additional collaborative and social venues nearby.
Corporate real estate leaders have a critical role to play as stewards of the future of work. Leaders will systematically consider transformative models and facilitate cross-functional strategies to enable successful business outcomes.