Telework driving rents down but offices may need more square feet per person

Making short-term office space decisions in the face of long-term uncertainty is one of the biggest challenges for association executives today. There may be money to be saved today, but what does the future hold?

CEO Update gathered three experts on June 30 to discuss current options for tenants—including lease renegotiations—and ways to capitalize in the years ahead on the trend to more telework.

"People are gearing up to change their office space post COVID, but with COVID still in mind, taking into consideration that there may be another pandemic," Mindy Saffer, a managing principal with tenant representation firm Cresa, told attendees of the CEO Update LIVE: Designing Office Space for a New Era. The webcast is available on the CEO Update website under the Events tab.

The other panelists were Robert Ivy, CEO of the American Institute of Architects, and Lisa Washington, CEO of the Design-Build Institute of America. CEO Update Editor-in-Chief Lynn McNutt moderated.

The pandemic has severely affected the finances of associations, but at the same time has convinced many executives that remote-working staff are productive and sometimes happier. As a result, groups may save money by using less office space. That, in turn, should drive rents lower as space becomes vacant.

"My team seems to have a greater work life balance (since the move to telework)," Washington said. "Getting rid of a commute means I can take a morning walk or an afternoon walk. People feel better. When they feel better, they actually seem to be more productive.

"Our Zoom staff meetings have been more cordial than most face to face. We're going to see more committed employees. The whole human dynamic of employees being happier, more productive and more appreciative is going to evolve out of this."

Another benefit is lower rents, Saffer said.

"If you are providing maximum flexibility to the employees, you are also not only going to be able to reduce real estate costs, but you're actually going to provide satisfaction and the ability to retain and attract really good talent."

Vacancy already was high in the Washington, D.C., market before the pandemic struck, she said.

"We are expecting higher vacancy rates and that's going to create even more pressure on the landlord community to reduce the real estate costs—the asking rents, but also their concessions (to tenants)," Saffer said.

Lease agreements are legally binding documents, but there are ways to address costs with deferred payments, temporary rent abatements, and lease extensions. The more time left on the lease, the more attractive options tenants will have, she said. But landlords may demand to see tenants' financial statements. Associations will have to demonstrate hardship, but also be able to explain how they will recover, Saffer said.

Saffer

‘Multidisciplinary team'
While associations will be able to operate with smaller office footprints, there is a limit to the lease savings. More space will likely be required between employees, Ivy said, pushing typical square footage per person to 300, from today's standard of about 100 square feet per person.

But beyond size requirements, associations will have to bring a variety of perspectives to office design.
"The landscape has changed, irrevocably," Ivy said. "It really is going to require a multidisciplinary team. As capable as architects are, it takes other people to help, perhaps engineers, perhaps social scientists, and a group of people to really consider what in your particular work environment is going to make a difference for you."

With that principle in mind, AIA has produced a report on reopening offices with disease-mitigation in mind. Downloads are available on the AIA site.

The panelists were careful to distinguish between short- and long-term considerations.

"In the short term, office building trends will focus more on cost-effective retrofits and safety protocols, like sneeze guards, adjusting the spacing of workstations, more frequent cleaning, maybe individually wrapped utensils, directional signage for flows so that people aren't crossing over each other as they enter and exit the building," Washington said. "Those are things that can be done relatively easily and cost effectively by an organization of any size."

Washington said the prospect of lower leasing costs in the short term shouldn't distract from the need for far-sighted strategies.

"It's important, in talking about office space moving forward, to understand your goals, challenges and constraints," Washington said. "It's almost like strategic planning specifically for space, and really thinking about not being reactive to COVID. We have to look at not just the initial savings, we have to look at long-term lifecycle cost and savings."

Still, decisions are needed soon, even before there is clarity on the future, Ivy said.

"The changes that we're seeing are real, and I am hopeful that there will be a vaccine, but until there is we have significant changes that are going to have to be made," he said.

Ivy

Saffer encouraged association executives to begin viewing office space as a in a different way.

"Think about an employee waking up in the morning, and just figuring out what to do today," she said. "‘Do I want to meet with my team? I could do that at the coffee shop. Do I want to get a vendor in and talk to them? I'll invite them to the office space.

"‘If I want to do some head-down work, that's probably going to be good in in the office, because I have children at home,'" Saffer said.

"It's looking at the office as a place where employees can be productive but are not required to be there. And also looking at it as a resource for your members" who may need meeting spaces while they are in town, she said.

Read more about negotiating leases and subleases, along with trends in rent costs, in the July 24 issue of CEO Update.