Which changes are actual disruptions of the status quo, and which are just accelerations of a pre-existing trend?
Half a year—and counting—into the global pandemic and many questions about the future have been raised, several theories have been asserted, and yet very few answers are known at this time. The current recession is both an economic challenge as well as a health crisis, and it is unlike anything we have experienced in the past 100 years.
With real estate having changed so much just over the past decade alone, one might wonder what the pandemic’s impact will have on the industry going forward. For instance, coworking had introduced new office concepts into the public consciousness, providing a fresh solution for freelancers and global enterprises. At the same time, growing venture capital interest in real estate had led to the rise of the PropTech universe, changing how occupiers and investors obtain, utilize, manage and maintain their space. Both of these trends, along with many others, are now running face-first into the dramatically altered world of COVID-19.
Although every crisis is new and unique, based on past experiences, we can examine with some confidence the trends within real estate likely to continue, as well as those likely to be halted by the outcomes of the current situation. How businesses operate will clearly need to shift in the wake of the current pandemic and economic recession. Which changes are actual disruptions of the status quo, and which are just accelerations of a pre-existing trend?
We weigh in here.
Trends being Accelerated
Working from home
In 2018, approximately 5.2 percent of employees in the European Union worked from home full time, and even fewer U.S. workers (3.6 percent) spent more than half of their time working remotely. The vast majority of full-time workers are accommodated in their workplace on any given day (84.2 percent of U.S. workers), even as between a fourth and a fifth of full-time workers spent at least part of their day working at home for an average of 3.1 hours. However, this represents about half of workers able to work from home,1 indicating that many businesses have not been overly progressive in pursuing distributed workforce plans.
In early 2020, however, most companies around the world were thrown into an involuntary, comprehensive work-from-home experiment. Surprisingly, most aspects of people’s workplace experience have been maintained.2 The ability to execute focused work is similar to pre-COVID-19, while teamwork has increased. However, the bond between colleagues is hampered by exclusively working from home, as is the connection employees feel with their company’s culture. Organizations must work harder to maintain the human element of the organization when everyone is working remotely. The office is a place for memorable events, learning, team events, socializing and parties. The office will no longer be a place to come and sit silently in rows doing individual work, especially at historical city center rental rates and commute costs.
Cost is king
Cost is always important, so this might not be a trend as much as a truism. However, the COVID-19-driven recession, like all economic downturns, will further sharpen the focus on cost containment as well as creating new strategies for how best to utilize office space. The Cushman & Wakefield office occupancy database shows that offices are underutilized with an average global utilization rate of 58 percent (56 percent in APAC, 61 percent in Europe and 56 percent in the Americas). Many organizations still size offices based on 100 percent occupancy. This enforced experiment will surely shine a light on this aspect of the office sector.
In addition, the economic challenges created by the current recession will put an increased emphasis on cost control. According to Gartner, three-fourths of CFOs are planning, as of early April, to shift at least five percent of employees to permanent work-from-home status.3 The cost-cutting priorities of CFOs will need to be balanced, however, with the human resources and business leadership demands to ensure workers continue to feel part of their company’s culture, feel connected personally with colleagues, and are equipped with space that inspires creativity, innovation and collaboration.
While the need for personal office space will reduce, the demand for other kinds of spaces will increase both within and outside the office. People will always need physical space and will always want to meet face-to-face. As we spend more time working virtually, the demand for better quality physical environments and experiences will increase. Office space will become more varied with much fewer desks and many more spaces to meet, eat, exercise and unwind.
Return of the suburbs
The rise of the city has been well documented. However, the suburbs are not dead. Rather, they are being reformed in the image of the dense, walkable, live-work-play environments that city centers embody. And a commonly recognized driver of urban growth and renewal—the Millennials—have been exiting the central business district (CBD) for a few years now. (At a normal rate, just like previous generations.) Affordability of housing and availability of school options have been a draw that has made Millennials the largest homebuying generation for the past few years, and the majority of homes they purchase are in the suburbs, while only 15 percent are in the city center.
Suburban submarkets contain approximately two-thirds of all office inventory in the U.S. However, in 2017 and 2018, only one third of class A office absorption occurred in those suburban areas. The nadir was 2018 when 84 percent of net absorption was in the CBD. Last year, the suburbs accounted for 69 percent of net absorption and the first quarter of 2020 saw almost all net absorption occur in the suburbs.
This trend was being driven by the relative affordability of space, the improvement in urbanized nodes of mixed-use developments with high-quality office space, and the demands of the workforce. The health and safety concerns of COVID-19 are causing workers and employers to reconsider the location strategy of their portfolio. Does it make sense to abandon office space in the CBD or center city? In most cases, no. Would multiple locations around a market, including suburban outposts, be a benefit to employees? Yes. Are suburban coworking locations—with the proper social distancing in the short term—a potential part of this strategy? Yes.
Trends being Reversed
An occupier's market...finally
The U.S. office market was uncharacteristically stable in its tightness through the economic expansion that came to an end early in 2020. While vacancies haven’t hit the lows we saw in 2007 (Class A office was 11.6 percent in Q3 2007), it has remained below its long-term average for an unusually long time (27 quarters as of time of print, starting in Q3 2013). The long, slow decline in vacancy rates and prolonged lower-end plateau mirror the broader job markets growth trajectory and is assisted by a more conservative development pipeline. For example, new inventory coming on the market in the three years prior to this recession (159 msf) is significantly lower than the previous two cycles (342 msf in 1999-2001; 203 msf in 2007-2009).
The rhetorical table is turning, however. U.S. class A CBD vacancy increased 26 bps in Q1 2020, which was the third straight quarter of increasing vacancy (+79 bps since Q2 2019). Rents stalled out as well, with class A CBD rents actually falling 0.4 percent quarter-over-quarter, while overall class A rents were essentially flat (up $0.09 or 0.2 percent nationally). Twenty-eight different U.S. markets experienced rent declines in Q1 2020, including gateway markets such as Boston and NY – Midtown South. In other areas around the globe, Q1 2020 rents dropped QoQ in 17 European markets, 15 APAC markets and six Greater China markets.
Typically, rent declines don’t begin happening until well into a recession (often two to four quarters after a recession has begun). This time, however, the opportunities for occupiers may be available more quickly as the widespread impacts of COVID-19 are flipping market dynamics between landlords and occupiers at a faster rate.
De-densification is not a word
It may not be a real word,4 but de-densification is getting used a lot these days. The push towards “open office” everywhere was more myth than reality; the best office layouts always incorporated a spectrum of workspaces to be utilized for different types of work (i.e., focus vs. social vs. collaboration vs. meeting, etc.). However, the movement towards more dense office space had certainly become a reality. The average square footage per office worker decreased by 9.2 percent between Q3 2009 and the end of 2019.9 This trend is no longer.
How we get around
Interestingly, even though most U.S. workers commuted via cars and public transportation ridership remained stagnant5 in a pre-COVID-19 world, there continued to be a premium for office buildings located close to public transportation. This is true in large gateway CBDs, of course, but also in historically car-centric markets such as Atlanta. For example, a Cushman & Wakefield study showed that rental rates for office buildings within walking distance of a MARTA (Metropolitan Atlanta Rapid Transit Authority) train station were 25 percent higher than those in the rest of the Atlanta market.6 This is also the case in suburban submarkets, such as Walnut Creek outside of San Francisco where office assets near BART (Bay Area Rapid Transit) boast lower vacancy rates (-420 basis points) and higher rents (20 percent).7 Driving to work is much less common in most European and Asian cities which are more focused on public transport and cycling to work.
In a post-COVID-19 world, however, the concerns related to public transportation are not merely convenience, comfort or speed. The specter of virus contraction looms large on a public train or bus. Commuters reentering their workplace are going to be more reticent to utilize public transportation and ridesharing. In fact, when COVID-19-related disruptions subside, 39 percent of Americans who previously used ridesharing and 45 percent of those who previously used public transportation expect to decrease their use of these services. In China, as reentry was occurring in March, only a third of public transportation users were using their original mode of transportation, while 40 percent had shifted to motor vehicles (such as private cars, taxis and ridesharing) and the rest to walking or biking.8 Even if these trends remain at only half these levels, there will be reverberations in how people get around and where employers want or need to be for their employees to easily and safely access the office.
A Whole New World
We don’t have a lot of answers yet and we are still early on in this pandemic, but one thing we know for sure – the world has changed, and how businesses operate and real estate as we knew it will never be the same.
Although these are true statements, they also contain echoes of overreaction that people are prone to amid a crisis. When economic activity resumes its normal pace and most workers reenter the workplace, yes, things definitely will have changed. Some of these changes will be reversals of long-holding trends while other changes will merely reflect the acceleration of trends that were already altering the ways we live and work. But at the end of the day, it’s important to remember, change is inevitable – and change can ultimately be for the good.
1 A University of Chicago, Booth School of Business report published in April 2020 indicates that 42% of U.S. workers are in jobs that can be conducted from home. This compares favorably to other large economies: Germany, 37%; France, 38%; United Kingdom, 44%; Brazil, 26%.
2 According to Cushman & Wakefield’s analysis of tens of thousands of employee responses to its Experience per SFTM consulting tool: How will COVID-19 and data shape the new workplace?
3 According to a Gartner CFO Survey. “A Gartner, Inc. survey of 317 CFOs and Finance leaders on March 30, 2020 revealed that 74% will move at least 5% of their previously on-site workforce to permanently remote positions post-COVID 19.”
4 “Densification” isn’t even a recognized word in the Merriam-Webster thesaurus
5 U.S.-Canadian ridership remains 8% below its mid-2014 peak. According to American Public Transportation Association data, total ridership reached 2,729,424 in Q2 2014. In Q3 2019 total ridership was 2,511,387.
6 Cushman & Wakefield, The Growing MARTA Market: Ever-Increasing Demand Driving New Construction and Rate Hikes.
7 According to Cushman & Wakefield analysis of Q3 2019 real estate data.
8 China Institute for Transportation & Development Policy (ITDP), Epidemic Travel Selection Survey.