Brokers brace for changes in post-COVID-19 office environment

BY Sunday, April 26, 2020 02:53pm

Offices across West Michigan sit temporarily vacant as the current statewide COVID-19 shutdown provides a stress test for businesses and their ability to operate effectively with a homebound workforce.

The drastic change in dynamics now has commercial real estate brokers wondering what effect this will have when a semblance of normalcy returns to professional life.

Mary Anne Wisinski-Rosely, a partner and office specialist at NAI Wisinski of West Michigan COURTESY PHOTO

“We’re just kind of taking guesses on where things will go and how it will be affected,” said Mary Anne Wisinski-Rosely, a partner and office specialist at NAI Wisinski of West Michigan. “I think it will definitely have an impact, but what that impact is is kind of up in the air.

“I’ve heard speculation that some people are going to find that working from home works great and offices can save money because they don’t need as big of a space. On the other hand, I’ve heard the opposite; working from home is challenging especially if you have kids and are trying to work around that.”

The short-term effect on office utilization amid the shutdown is undeniable. In fact, a recent study by MIT revealed that 34.1 percent of respondents that were previously commuting to work were now working from home because of the COVID-19 pandemic.

Aside from some companies getting a taste of what remote work life is all about, the prolonged shutdown continues to threaten the livelihood of many businesses, which also could potentially eventually affect office demand and lead to more vacancy.

Upward trajectory

The West Michigan office market came into 2020 on a strong note, and could still retain its footing even after the short-term stallout ramps back up.

Recent reports from the West Michigan office of Colliers International chronicled a market in which vacancy rates were dropping and rental rates have consistently crept upward.

In its 2020 forecast, Colliers reported that in 2019, the vacancy rate in West Michigan fell below 10 percent for the first time in 30 years. Office vacancy in downtown Grand Rapids was 9.4 percent in the first quarter and 6.2 percent in the suburban market, according to a Colliers market report last week. 

As well, rental rates in the Grand Rapids market have gone up around 50 cents per square foot each year for the last 10 years. For the first quarter, rates increased to $21.68 per square foot in the downtown market, according to Colliers.

With demand and the evolving needs of tenants up in the air, these rates still appear relatively unshakable.

“I think it depends on where vacancy ends up,” Wisinski-Rosely said. “People are in leases right now. We’re not all of sudden going to have 50 percent of the space vacant. I think a lot of it depends on what happens to businesses. Will some shut down? Are some going to work from home?

“We had a very strong market until this happened. I think there will be some effect on prices. But I think landlords will try to find more incentives for tenants, which we saw in the downturn last time.”

Those incentives could include more tenant improvement allowances or free rent in some cases. 

Office broker David Wiener agreed.

“Most companies that are into a lease, they don’t enter into a three-year lease,” said Wiener, senior vice president at Colliers International in West Michigan. “Strong companies, large or small, (that are) doing full build-outs will sign seven-, 10- or even 15-year leases. When you’re looking at the long-term rates, I don’t see this short-term health recession affecting the long-term rental rates of the office market, especially with interest rates where they are.”

A case for more space

Colliers noted in the first quarter report a trend of “many companies hitting pause on their assessment of office space requirements” amid the pandemic. 

The concept of social distancing has been at the forefront of virtually everybody’s minds and lexicon throughout the thick of the COVID-19 crisis. Commercial real estate brokers are trying to anticipate whether or not this concept or other new health-conscious practices will stick and how that will change the look of the modern office.

Both Wiener and Wisinski-Rosely ventured to guess that social distancing is here to stay, even if it’s pared down from the more extreme measures currently in place for the general public.

To accommodate effective social distancing, Wiener said that tenants could possibly see a need for more office space instead of less.

“State-of-the-art office space is about collaboration,” he said. “It’s about shared space, hip space — a lot of the cool spaces have pool tables, all these facilities have wonderful amenities. Even here at Colliers, we have a main area where we can entertain. So, with that, we’re seeing less private offices.

“We’re also seeing, if you go back a number of years, the average employees per thousand square feet was about two-and-a-half or three. Right before (the COVID-19 crisis), we had clients with six to 10 employees per thousand square feet. I don’t see that as something that will come back regardless of what happens.”

Businesses also could be looking for more functionality in office furniture, going from shorter to taller cubicles and perhaps additional barriers becoming the norm. Wisinski-Rosely also agreed that life after COVID would merit alterations to office space.

“We’ve seen a shift from private offices to open working environments to now a shift back to maybe a combination of the two,” she said. “Maybe private offices become more common. I think there will definitely be an impact.”

While working from home might be acceptable to management and be logistically possible, many professionals simply might not prefer it.

Wiener said that in cases in which companies want to be prepared for any similar health events in the future, they’d need to tell themselves: “We need to plan for space, to be here working safely and social distancing. We need to take more office space.”

Catalyst for culture

By estimations of Wiener and Wisinski-Rosely, the many intangible benefits that come with working inside an office are simply too valuable to give up entirely.

“Over the past five years, I have repeatedly said that the culture, amenities and quality of the space are the most important thing to companies,” Wiener said. “You have companies that spend 70 to 80 percent of their expenses on people. Their real estate is not really a big expense in their corporate structure.

“Having the right space is important. Companies don’t even mind paying more for it. They want a cool space. They want to walk to a bar across the street. They want to bike to work. They want great collaborative space upstairs.”

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