As much as everyone would like to move into a post-pandemic era — and despite progress in treatment and prevention — the virus and its impact are still relative.
The path forward for business leaders is complicated. There are new realities that cannot be ignored or avoided, and for many organizations the use of commercial office space is now in transition. At this moment it appears that the office market in 2022 will be shaped by several emerging trends.
- Companies are reconsidering business plans and approaches.
- The worker shortage is real.
- Amenities are central to return strategies.
- The work-from-home potential is limited.
- The return of the commercial office market.
Companies are reconsidering business plans and approaches
The majority of business leaders across the country devised their operational plans with the thought that the introduction of vaccines would result in a more-normalized business and social environment. Unfortunately, we’re clearly not back to the virus-free days of 2019.
KPMG, in its 2021 CEO Outlook, found that, in the summer of 2020, most executives — 69% — felt it would be necessary to downsize office space. A year later, in the summer of 2021, the trend had reversed: just 21% planned reductions.
Rather than downsize, the new goal is adaptability, making space more flexible. KPMG found that 51% of the CEOs surveyed “are recognizing the demands created by a rapidly evolving future of work and will be looking to invest in shared office spaces to allow for increased flexibility.”
This is up significantly from 14% at the start of 2021, and more evidence that plans which once looked settled and secure are changing as the pandemic remains with us.
The worker shortage is real
Not since the Great Depression — if then — have employment levels fallen as quickly as they did in early 2020. In mid-March of that year, there were 1.8 million individual unemployment claims, a number that reached 23.1 million by May 9th, 2020. By mid-December 2021 we were back down to roughly 1.7 million claims, but the balance between employers and workers has been altered.
The hunt for qualified employees, especially those with unique talents and advanced skills, has shifted the labor market. Even though additional federal payments for the unemployed under the American Rescue Plan and the Coronavirus Aid, Relief and Economic Security (CARES) Act have ended, a large labor shortage remains. More than four million payroll employees have left the workforce since March 2000.
The result is that workers in many fields now have considerable leverage. Writing in October, Mark Zandi, Chief Economist with Moody’s Analytics, explained that we now have an “Alice-in-Wonderland job market characterized by record open job positions but high unemployment, with millions more out of the workforce not looking for work and not counted as unemployed.”
As The Washington Post reported in December 2021, a year earlier the “unemployment rate was 6.7 percent, with 10 million fewer people employed than before the pandemic. Expectations were that it could take years for the labor market to heal.
“Then, the economy experienced two historic surprises. First, demand for workers came soaring back at a velocity almost never before seen. And second, despite companies going all out to hire, millions of workers either retired early or stayed on the sidelines.
“These two forces collided to create the most unusual job market in living memory — and an economy afflicted not by too few jobs, but too few workers.”
The catch is that the definition of a “good job” is not just about a financial package. Many office employees now want something more, essentially a better workplace lifestyle to go with a better income.
Amenities are central to return strategies
Employers have increased wages to be competitive but, equally important, they have also changed working conditions. Rather than a set workday at a set location, an increasing number of workers now have more flexible hours as well as an increasing opportunity to work from home (WFH).
“Employees,” writes Marissa Huber, the Workplace Strategy Director with Cushman & Wakefield, “want amenities and perks that really matter. From the flexibility to come into the office to participate in fireside chats with their CEO to pet daycare for their pandemic pups with separation anxiety to onsite massages, employees want amenities and perks that demonstrate they are seen, valued, and appreciated…in the office.”
“To meet the growing demands of the built environment,” Huber continued, “nearly all industries are leveraging highly-amenitized buildings to attract and better serve the office-based workforce.”
Work-from-home potential is limited
There’s no doubt that work-from-home (WFH) options have become a highly-visible workplace perk. However, what’s rarely said, is that relatively few employees actually have that option now or will have it going forward.
According to McKinsey, “the potential for remote work is highly concentrated among highly skilled, highly educated workers in a handful of industries, occupations, and geographies.”
It adds that “more than 20% of the workforce could work remotely three to five days a week as effectively as they could if working from an office. If remote work took hold at that level, that would mean three to four times as many people working from home than before the pandemic.”
If 20% of the workforce can potentially work from home, and if that percentage is three to four times the number of remote workers before the pandemic, it means that roughly 5 to 7% worked from home prior to 2020.
But not every business agrees. Many will consider “flexible” or “hybrid” options for selected employees, even as they plainly prefer a general return to office settings.
The WFH movement was initially powered by the emergency nature of a fast-moving pandemic. Goldman Sachs, as one example, was quickly able to move 98% of its workforce to home locations at the start of the pandemic, according to CNBC’s Squawk on the Street.
Now, however, Goldman Sachs CEO David Solomon offers a different perspective. In February, Solomon told Bloomberg that remote employment was “not ideal for us and it’s not a new normal. It’s an aberration that we are going to correct as quickly as possible.”
Solomon is not alone.
Jamie Dimon, the JPMorgan Chase CEO, wrote in a recent shareholder letter that “remote work virtually eliminates spontaneous learning and creativity because you don’t run into people at the coffee machine, talk with clients in unplanned scenarios, or travel to meet with customers and employees for feedback on your products and services.”
Research from Microsoft also suggests that the WFH movement has both pros and cons. Company researchers looked at data for more than 61,000 employees during the first six months of 2020 and found that “firm-wide remote work caused the collaboration network of workers to become more static and siloed, with fewer bridges between disparate parts. Furthermore, there was a decrease in synchronous communication and an increase in asynchronous communication. Together, these effects may make it harder for employees to acquire and share new information across the network.”
Lastly, the workplace migration from traditional office to a WFH hasn’t proven to be better. Some employers are beginning to see what’s been coined the “Boomerang effect,” where former employees want to return, due in part to the lack of comradery found at their WFH job.
The return of the commercial office market
By any standard, 2020 was a year of massive disruption. The federal government injected trillions of dollars into the economy in an effort to prevent an outright depression. Such efforts as additional unemployment assistance, $1,200 checks for millions of taxpayers, a higher minimum wage, large-scale security purchases by the Federal Reserve, and the Payroll Protection Plan (PPP) kept the country afloat. The results were impressive: In the first six months of 2020 banks received additional private deposits worth more than $2 trillion and at the start of 2021 mortgage rates reached a record low, 2.65%.
For commercial office markets, however, the initial reaction to the pandemic in early 2020 was harsh. In an environment without a vaccine or a full understanding of the virus, businesses moved workers home and placed operations online. Leasing and subleasing levels sharply declined.
But now times have begun to change. Offices are re-opening. Numerous safety protocols have been created, and many businesses have established vaccine and testing requirements. Amenities have been added, schedules adjusted, and workspaces reconfigured.
Workers, for their part, have begun to return. Kastle Systems, which uses access control data to track weekly office usage, shows both that activity levels in 10 major metropolitan areas lag when compared with pre-pandemic usage levels, but also that usage has risen significantly since the depths of early 2020.
As to businesses, many continue their commercial office investments either through leasing or ownership. The Commercial Cafe, using data from CommercialEdge, shows that in 2021 alone, at least eight markets have 4 million sq. ft. of new commercial space in their pipelines.
Tech companies have consistently been the majority of leases signed throughout the pandemic.
For instance, Google (Alphabet) — which now has 12,000 New York employees — has announced that it will soon close on its $2.1 billion purchase of the St. John’s Terminal. The Manhattan building will be part of the company’s Hudson Square campus, a complex with 1.7 million sq. ft.
On the West coast, in 2020, Facebook (META) bought REI’s newly-built corporate campus in Bellevue, WA., for $368 million, according to The Seattle Times. The paper reported that “Facebook, which opened its first Puget Sound office in 2010 with three engineers, now employs more than 5,000 local workers across 3 million square feet of space in dozens of locations in Seattle, Bellevue and Redmond, placing it neck-and-neck with Google for the title of the area’s largest out-of-town tech employer.”
What’s more, in December of 2021, Facebook (META) also leased 719,000 square-foot of tech space in Sunnyvale, California.
Or, consider Amazon. It is investing more than $2.5 billion in its HQ2 project in northern Virginia, just outside Washington, DC. The project includes construction of The Helix, a unique, cone-shaped, building. The company expects to create 25,000 jobs at the site during the coming decade.
Would these massive tech companies — companies with vast amounts of business data — spend billions of dollars on commercial office space if they intended to become largely work-from-home organizations? And, if the pandemic ebbs, isn’t it likely that offices will largely re-open, designs and functionality will evolve, selected employees will have greater time-and-place flexibility, and that commercial office space will once again enjoy strong demand?
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