COVID-19 completely changed the way America works. The effects of forced office closure and the migration of employees to remote working was disruptive, to say the least, to the commercial real estate market. But how will it fare going forward?
Nancy Muscatello, Managing Consultant with CoStar Advisory Services, addressed this issue with members of the Florida Chamber of Commerce during its Transportation, Growth & Infrastructure Solution Summit yesterday. She expects volatility as our post-pandemic economy evolves, remote working to continue, demand for office space to remain, and for that space to reflect new social distancing and safety needs.
She cautioned, “The shape of the economic recovery will dictate how the commercial real estate market ultimately fares.”
She said that most major markets entered this pandemic period from a “position of strength.”
“The share of the office inventory that is occupied is well above its historic average in nearly every major market. Florida metros have fared well in this regard, with Palm Beach, Tampa and Orlando showing occupancy rates today that are 2.5 percent higher than their 10-year averages,” Muscatello said.
She said that since new construction levels were lower than usual, nationally, it helped equalize the drop in demand due to the pandemic. The demand level of tenants for office space completely collapsed during the peak of the pandemic as people began working remotely and businesses were forced to close, but demand is expected to improve moving forward.
But she still expects more weakness in the months and quarters ahead.
Remote work is not going away. Some tenants, according to Muscatello, are embracing the cost savings of reducing their office footprint, made possible by having employees work remotely.
Others, across the nation, face the logistical challenge of getting office workers from home to the office. “Fear of crowding in subways, offices, and other gathering places poses the most significant challenge to our largest, most dense cities, while smaller, more car dependent cities will largely avoid this problem,” she explained.
She said, “Although it’s still early, the future of continued remote working is coming into clearer focus. Looking beyond the pandemic, it is becoming clearer that employees want to remain working from home, but only part of the time.”
She said the consensus of many surveys conducted in previous months suggests most employees would prefer to return to the office for at least part of the week after the risks from the pandemic have subsided.
“In almost all instances, the hybrid option, where employees spend part of their time at home and part of their time in the office was the clear winner,” she said. “There is no doubt that the future office will need to evolve to stay relevant, but clearly there is still a desire and a need for office space.”
For some firms, that need will be for less space. Others may need to sustain or even increase their lease size to maintain safe distancing requirements.
She said trends for the last decade or so were to improve efficiency in the workplace with office designs featuring open floorplans with less square footage per employee. Since the pandemic, social distancing will demand those employees to either spread out more or for there to be fewer of them in the office at one time
Muscatello also discussed the importance of safety in the workplace, moving forward, for those returning to the office. Offices will require design and infrastructure changes that will promote safer and healthier space. Examples include touchless entry for doors and elevators, installation of thermal scanners to take employee temperatures, and adding modern HVAC systems that avoid recirculation of air.
“Office Buildings that can provide these features will be more likely to achieve stronger tenant retention and be in the path of growth when demand resumes. We think that newer buildings hold the advantage here. Older office stock is at risk of falling into obsolescence in the post-pandemic environment if it can’t provide the right health and safety amenities for tenants and employees to feel safe.”