The Office Is Dead
This article was originally featured on Marker.com.
In early March, Jeff Haynie, the CEO of Austin-based software company Pinpoint, was gearing up to find new office space. Pinpoint’s $25,000-per-month lease with WeWork for 1,800 square feet would be up in August, and it was time to move on. He was thinking he’d need maybe 10,000 square feet for his growing company, which makes software for programmers.
Then the pandemic hit, and along with it, the enforced work-from-home orders, and Haynie began questioning his figures. A survey he conducted a month in revealed that roughly half of the company’s 27 Austin employees would be perfectly happy to continue working from home. Maybe Pinpoint could get by with 3,000 or 5,000 square feet — less than half the amount of space he’d thought he needed — foregoing desks for basically a conference room and a little collaborative working space. And maybe, given that fewer employees might need to commute regularly or during rush hour, it could be in a neighborhood far cheaper than the Domain, the hot tech cluster where Facebook and Amazon also have offices. “It’s not something I was even thinking about six weeks ago, but it’s definitely something I’ve been talking about now with my investors,” Haynie says. “Overall it’s a win-win.”
This is just the tip of the iceberg. From startups and tech giants to more old-school Wall Street firms, businesses are rethinking the role of office space and whether they even need it. If, in the old world, an office was a form of corporate peacocking — a flashy location in some iconic building with a boutique-hotel level of design for clients, employees, customers, and investors— in the new world, it is becoming a very costly line item that could be reduced to the equivalent of a single flagship store. Instead of a sprawling, capital-intensive, real-world footprint, all the work can be done virtually, with one scaled-down symbolic home base left for critical face-to-face conversations, like meeting with clients or wooing talent. Perhaps in a space not much bigger than your average Le Pain Quotidien.
It’s something no one could have foreseen three months ago. After a decade of economic expansion, commercial rents had risen to an average of nearly $30 per square foot, or 3.4% over last year, according to an April report from Newmark Knight Frank, a New York-based commercial real estate brokerage firm with offices in some 100 U.S. cities. Many companies had an aversion to remote work — IBM, for one, canceled working from home in 2017 — and few had the technology or infrastructure to make it work seamlessly. IBM was hardly alone: At the outset of the crisis, remote work evangelist and Basecamp co-founder David Heinemeier Hansson Twitter-shamed dozens of companies — including Accenture, ATT, Cognizant, Epic Systems, Tesla, SpaceX, and Wells Fargo — for dragging their heels in allowing employees work from home.
Now, more than two months in, the mass work-from-home experiment has forced many businesses out of their comfort zone, pushing them to make the necessary small investments in virtual infrastructure. Even typically staid financial firms like Morgan Stanley and Barclays have adapted, finding solutions to security hurdles that previously prevented a distributed workforce. Many of these companies are realizing that it is not only less scary than they imagined, but their employees are actually more productive. One analysis of server activity found that workers are putting in longer workdays; imagine what that kind of productivity boost might look like when kids finally go back to school. Now, staring down the barrel of a recession, companies are shifting into cost-cutting survival mode — and the huge fixed cost of office space will, for many, be first on the chopping block.
Since the pandemic, Google’s parent company Alphabet pulled out of deals to acquire more than two million square feet of office space.
A study by SquareFoot, which specializes in helping businesses find office space, found that companies in New York City spend an average of $17,020 per employee annually on office space. As companies fight to survive, that’s an awful lot of cash to burn on something that, it turns out, can be replaced by space in employees’ homes. Many commercial leases — which are often 10 years — require companies to foot the bill for unusable space, such as columns and structural elements as well as a portion of shared areas such as the lobby, bathrooms, and elevators. Among other things, a 10-year lease helps lock in prices, something desirable in times of economic expansion but a potential chokehold now.
And so comes the office space exodus. Since the pandemic, Google’s parent company Alphabet has pulled out of deals to acquire more than two million square feet of office space, including what would have been the biggest real estate deal in the Bay Area, according to The Information. James Gorman, the CEO of Morgan Stanley, recently told Bloomberg that the company has proven it can operate with “effectively no footprint” and will have “much less real estate” in the future. Insurer and financial services provider Nationwide announced plans to close five offices, permanently transitioning those employees to working from home. “We’ve been investing in our technological capabilities for years, and those investments really paid off when we needed to transition quickly to a 98% work-from-home model,” CEO Kirt Walker said in a company statement. Groupon, which recently laid off or furloughed roughly 44% of its workforce, is looking to sublease 150,000 square feet in its riverside headquarters, says the Chicago Tribune. And on Friday, real estate development startup Culdesac announced it would be giving up its San Francisco headquarters. “Remote work is going great for us,” tweeted co-founder Ryan Johnson.
Meanwhile, Roy Abernathy, head of global corporate services workplace strategies at commercial broker Newmark Knight Frank, has started getting requests from clients reevaluating their current situation: “I was just on a call where the CFO said, ‘I want you to go back to the landlord and shed 25% of our space.’”
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As we settle into the idea that things might not return to normal until 2022, cities are already starting to lose their sheen. Workers pay a premium to live there — for the arts, for the cultural texture, for the jobs — but with the end of the pandemic nowhere in sight and the newfound ability to work from anywhere, talent is already getting antsy. It won’t be long before cities’ most talented workers flee high-priced cities for more spacious, affordable spaces elsewhere in the country. And rents for office space in big cities — once prized for their density of talent and mass transit options, and now struggling to adapt in the age of social distancing — could begin to plummet.
There isn’t enough data yet to determine exactly how much office rents might decline, and it will vary considerably by market, says Alexander Paul, Newmark’s senior managing director and head of national research. So far, there hasn’t been a noticeable fall in prices, even in expensive markets hit hard by the coronavirus, according to Yardi Matrix data compiled by Commercial Cafe, a real estate listing firm that provided analysis at Marker’s request. Prices remained steady in New York City (an average of $85.84 per square foot in March, $85.93 in both April and May, and up 12.6% from last year) and even rose slightly in downtown San Francisco ($92.13 in March, $93.29 in April, $93.55 in May, up 0.6% from last year.)
That’s likely because rents are historically slow to respond to economic downturns, explains Jack Burns, managing principal of tenant representation firm Cresa, noting that in the past three recessions it took about a year after the recession’s peak before real estate costs reflected those downturns. “Real estate costs are driven by supply and demand, and when there’s a lot of vacancy, landlords get more flexible and drop the rents because they need a tenant,” he says. “But right now, vacancies are really low, and they will be until we sort of get through what we’re going through in the next six months. And then we’re going to see a lot of space up for sublease, and that will throw a wrench in the supply chain and force landlords to drop prices.” It also may be several years before the dust settles because so many companies have long leases (Groupon’s, for example, is through January 2026).
This may also put an end to our love affair with the almost 150-year-old concept of the skyscraper, which arrived in New York and Chicago in the late 19th century as developers tried to make the most money per square foot of land as well as answer the growing demand for white-collar office space. Increasingly safe and fast elevators also completely changed the market: Upper floors, with their dramatic views and removed from the noise and dust of the street, commanded higher rents. Offices themselves grew increasingly lavish, with the New York Times in 1981 noting a trend for “fancy lunch rooms” and after that, an ever-escalating amenities arms race. We’ll take your vending machine and fitness center and raise you a golf simulator, a dog run, and a complimentary nail salon — plus luxe private bathrooms bedecked with 20,000 pennies or murals of ocean waves.
Now it’s hard to imagine wanting to cram into an elevator to get up to these spaces. As was the case after 9/11, lower floors may temporarily command higher rents than the sky-scraping ones post-pandemic, in part because of the logistics required to keep too many people from sharing the same elevator air.
The likely shakeup could have far-reaching consequences because commercial real estate has long been beloved by big pension funds and people looking for reliable income, two groups that will see some of their money evaporate. The industry has historically been so stable that 15%, or even 5%, of tenants thinking about space differently “could really destabilize the market,” says Dror Poleg, author of Rethinking Real Estate and co-chair of the Urban Land Institute’s Technology and Innovation Council in New York. “It’s a very boring type of asset class that is becoming a lot less boring,” he says.
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The current crisis will upend commercial real estate, changing everything from lease terms to management to financing. For now, those in the industry are largely focused on redesigning office space for the new reality of social distancing — repurposing conference rooms with desks, adding touchless doors and temperature sensors, and rearranging furniture and signage to direct workers clockwise through the space without backtracking, the way many grocery stores are now directing shoppers. There’s such logistical complexity that real-estate services firm Cushman & Wakefield created a 300-page manual to help 10,000 clients return to work in China; luckily for the rest of its clients, it has since been distilled into 30 pages. The company, which introduced a concept it calls the Six Feet Office, also expects to do a brisk business in “recover readiness,” with a flat fee structure for customizing guidelines up through the more expensive “space auditing” and “change management.”
Meanwhile, Newmark is racing to add a “Covid overlay” to build-outs that are already in progress, to make the space more agile to deal with social distancing and health standards. In some cases, that means shrinking individual offices so there can be more of them or getting rid of communal conference rooms—at least for now. And chair ordering has ground to a halt.
Architecture firms are predicting an explosion of what Nena Martin, director of workplace at architecture giant Gensler, calls “Swiss army knife” furniture that can be easily modified for multiple uses. There will be more “agile chairs” with a small surface you can rest your computer on if you want to take notes during a meeting, she says. These would have been of use, for example, at a recent Gensler meeting in China, where instead of sharing a table, employees had their laptops and tablets in their laps.
Already, architecture firms are anticipating that offices may no longer be places where individuals congregate to do their work in parallel, but visit sometimes to collaborate. “We think that in the next three to five to seven years there will be a reduction of square footage and companies being really thoughtful about what they’re doing in their space,” says Martin. So far, none of the projects in her region of Austin have been canceled, she says, only paused.
If, in the old world, an office was a form of corporate peacocking — a flashy location in some iconic building with a boutique-hotel level of design for clients, employees, customers, and investors — in the new world, it is becoming a very costly line item that could be reduced to the equivalent of a single flagship store.
A radical rethinking of space is already happening at EverQuote, an online insurance marketplace with 300 employees and 38,000 square feet in Cambridge, Massachusetts. The company had outgrown its space and figured it would do what companies have always done: “You grow, you get more space,” says Elyse Neumeier, its chief people officer. But the work-from-home experiment has gone well enough that the company is now contemplating just recalibrating the existing office into an off-site space to be used for big planning days and team-building retreats.
Rethinking Real Estate’s Poleg says office tenants will want (and will likely get) more flexibility and more service — which is less about offering kombucha and pool tables and more about landlords accounting for companies’ changing needs. This would be in stark contrast to the existing dynamic, in which companies have little negotiating power between leases. The Newmark Knight Frank report notes that building owners “may choose to use concessions as the main vehicle for meeting tenant demands on overall occupancy costs, rather than reducing asking rents.”
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With record unemployment, an unprecedented economic crisis, and a remote work awakening, those in the $2.5 trillion office space market should be panicking. But few are ready to succumb to that idea just yet, at least publicly. Many point to the other prophecies of doom the industry experienced after SARS, mad cow disease, and 9/11, which never came true. “We forget [our fears] quicker than you think,” says Abernathy of Newmark Knight Frank. “After 9/11, there was at least the supposition that no one would want to be in a high-rise again.”
Commercial real estate experts like Abernathy say that companies shrinking their offices will be offset by those now actually expanding their footprint for social distancing. Space per person in offices has shrunk about 8% since 2009, according to a report from Cushman & Wakefield; social-distance could require a reversal.
SquareFoot CEO Jonathan Wasserstrum admits that the second quarter is “going to be very bad” for his company, but he refuses to believe this could spell the end of office life as we know it. “There’s a 0% chance that the office is dead,” he says. “The fact that remote work works doesn’t mean it’s better in the long term.” (After all, the savings connected to shedding 78 million square feet of office space wasn’t enough to keep IBM working remotely in 2017, but three years ago might as well be another lifetime.)
Others in the industry agree with him. “I think it’s going to be a balanced equation. You’ll have more relaxed density but less people in the space,” says Bryan Berthold, a senior managing director of Cushman & Wakefield and the company’s lead on workplace strategy. “But the net-on-net is probably the same footprint. I don’t think there will be a startling change.”
Spencer Levy, a senior economic adviser for real estate investment firm CBRE, argues that the tech industry moved away from flex work about seven or eight years ago because they discovered the office “was a superior way to work,” spurring the “amenitization of the office.” Sure, Levy says, we’re suddenly having a moment where people are realizing they might not need all this space, “but the reality is that you haven’t needed office space for at least the past 10 years, but people still want it.”