We spoke with Giovanni “Gio” Cordoves, KBS Western regional president, regarding the outlook for office recovery in light of current obstacles — and which markets are best positioned for a strong recovery in the coming year.
Kastle reported the national office occupancy rate hovered around 47% for the last few months of 2022, with 55% reported for midweek days. What occupancy levels do you foresee for 2023?
The office sector is tremendously nuanced, and occupancy levels vary depending on the market. Recovery will continue to look significantly different in San Francisco than it has in Miami because there are so many different factors at play — from climate to industry clusters and so much more. By continuously tracking fundamentals and specific office properties within 25 select markets throughout the country, KBS studies a broad array of information to determine which markets make sense for us to invest in. By doing so, we’re highly aware of the markets where office properties are populating at faster rates.
In the Southeast, for example, where we own a solid portfolio of office assets, we’re seeing 75% occupancy levels on average. We also have some buildings in Texas that have been running at over 90% occupancy for quite a while.
Despite the presence of macro-headwinds, many of the markets where we own have been experiencing strong leasing activity; those include South Florida, Atlanta, Austin, Salt Lake City, Dallas, San Antonio and Bellevue, Washington, to name a few. We’ve seen a slower push toward normal in other markets — they’ll get there, but it will take them longer. These slower-to-recover markets also hold incredible opportunity for growth down the line.
Due to the quality, location and amenities at our properties, KBS prides itself on the ability to lease space in any market. We’ve been in the industry for 30 years and have seen many cycles during that time — so we’ve found ways to do just that.
Do you foresee the five-day in-office workweek coming back in 2023, or will it be more of a balance between hybrid and remote schedules?
One aspect we’ve seen in every market and every office-using industry is that people benefit from being together in the same office. This was true pre-COVID-19 and continues to be true now. It hasn’t changed.
Companies have found ways to function remotely, but they’re aware that it’s still not the same as being together.
At most companies, even here at KBS, we had a lot of flexibility in where we worked prior to the pandemic. We traveled, worked from other offices or from home some of the time, but we didn’t see a lot of headlines about it before the pandemic. Now that all the research companies are tracking office occupancy levels, we’re hyper focused on these policies. While we see a form of hybrid being here to stay, the difference will likely be between hybrid and five days a week in the office rather than between hybrid and remote work.
A combination of working in the office and working outside the office will continue to be part of corporate America’s culture. Just as we need flexibility, we also must have a central place for people to come together for work. In addition to strengthening company culture, this is how we build the next generation of leadership — and it’s true across all types of businesses. This realization will continue to drive office occupancy levels well into the future and make a central office indispensable in the business world.
Speaking of the next generation of leadership, how do you think millennials and Gen Z workers will impact office occupancy rates?
Although it’s hard to broad-brush an entire generation, we’ve found that younger workers want to be in the office. They need to be around others their age and to have mentorship from older, more experienced co-workers. Sitting home by themselves doesn’t seem to be a smart decision for anyone who wants to grow in their careers, learn and be successful. It’s also not a good way to demonstrate their skills and abilities and advance in the way that being in the office with face-to-face interactions allows.
Environmental, social and governance (ESG) criteria is clearly top of mind for the younger workforce. How do you see it impacting office building operation and management moving forward?
Along with many of our peers, we have incorporated many elements of ESG practices and protocols for a long time. The buzz now is about documenting and reporting on it to the world. This speaks to transparency, which is good, but the practices themselves are nothing new. In addition to recently establishing a dedicated Green Team, our company is working toward more certifications in this regard. In fact, we recently received a very high initial score from one organization before even beginning an ESG program. Doing things the right way has always been a part of who we are as a company.
Shifting to the economy, as the Fed continues to aggressively raise interest rates, how do you think this will affect tenants inking new and/or renewal leases?
It’s difficult for businesses to forecast and plan as interest rates fluctuate, which makes now a particularly challenging time for office owners and users. That said, we’re still leasing space — especially with many smaller tenants willing to make long-term commitments regardless of the economic climate.
While some may see large single employers as the best tenant targets, the bread and butter of KBS’ portfolio is actually, on average, smaller, well-credited tenants given that we’re more often than not an owner and operator of multitenant buildings. There are a multitude of local decision-makers willing to commit to leases, as office space is critical to their business. This is one reason why our spec suites program of turnkey office space for smaller users has been successful in so many markets.
Moving on to a lighter topic: We’re hearing a lot of buzz surrounding “collaborative spaces” for employees, especially with offices repopulating and some owners implementing unique amenities, such as a Porsche Taycan ride service. Which amenities do you feel best provide that vibe for users?
Personally, I think the most impactful office amenities are those that spark collaboration and creativity, such as a great tenant lounge and conference space that truly works for meetings. Also, people like a change of scenery in their workday, making activated outdoor space at an office property highly desirable. People want to be outside more than ever these days, so offering modern indoor space and Wi-Fi-enabled outdoor space at the same asset is ideal.
Since each building is different and its location doesn’t always offer the necessary space for outdoor use, it’s key to provide attractive, functional workplaces that motivate people to come back to the office. Providing them with unique choices that are tailored to their region’s interests provides them with choices in where and how they work. That’s what really resonates for office users today.
What benefits do office assets offer investors looking to diversify their portfolios?
Investment strategies of course vary and change along with the movement in the overall economy. Today, in many cases, office properties can provide investors with upsized current yield against lower-yielding opportunities. While investors in other CRE sectors, such as industrial and multifamily, are counting on rent growth and upside upon sale to achieve positive returns, today’s office investors, generally speaking, don’t need to rely on these elements as much. We also benefit from the great variety of industries that make up our tenant mix. Office properties — especially multitenant office properties — aren’t subject to any one industry experiencing a downturn. Therefore, office will remain an attractive investment in 2023 and beyond.
Learn more by visiting KBS.com/Insights.