The COVID-19 pandemic threw the office sector into turmoil. Companies sent their employees home. Office space sat empty. And tenants began wondering just how much office space they’d need even once the pandemic faded.
Today? The office sector still faces plenty of uncertainty. But there’s also hope. And all those companies that were considering shedding massive amounts of office space? That hasn’t happened.
Andrew Urban, vice president of corporate services at the Indianapolis office of Colliers, knows the office market, both in his home base of Indianapolis and across the country. And he has good news for office building owners: He said that he is seeing signs of increased activity throughout Indianapolis, both in the form of residents and out-of-towners walking the streets of downtown and investors looking for new homes for their dollars. And this has positive implications for the office market.
“People at this point are eager to get back to their normal lives,” Urban said. “Six, nine months ago, it was a different story. But you talk to people now and they are itching to get things back to some semblance of normal, with some adjustments, of course.”
Urban focuses on the office market, closing leases across the globe. He also works with companies in Indianapolis. What changes he has seen in the office market since the COVID-19 vaccines began rolling out?
He says that there’s a difference today between the office markets in cities that saw stricter lockdowns and stay-at-home orders and those that didn’t.
He compares markets like Indianapolis and Dallas, where the COVID-19 restrictions weren’t quite as strict, to places like New York City that were shut down more heavily. Politics aside, Urban says, the cities in which restrictions were not as severe are seeing their office markets perform more strongly today.
Urban warns, though, that the severity of shutdowns isn’t the only reason why certain office markets are thriving today.
“If you peel back the onion, lockdowns and masks aside, there are other things driving the markets that have fared better,” Urban said.
Those factors? Markets that have seen population growth, lower taxes and a lower cost of living are generally seeing a stronger office market today, Urban said.
“The bigger cities that have long been the kings of the hill in office haven’t had those positives lately,” Urban said.
Not all tenants are created equal, either. Urban said that law firms have been some of the first tenants to return to the office, with mid-sized or boutique firms leading the way.
“If you think about law firms, they generally have more space per attorney,” Urban said. “They have built-in social distancing. Often, lawyers have their own offices. That makes it easier to have that space everyone wants today. We have seen that end of the office market pick up.”
Then there’s the fact that law remains largely an apprentice business, Urban said. New lawyers fresh out of law school typically work for a partner. This partner mentors the young attorney. It’s difficult to foster this mentorship without face-to-face interaction, Urban said. This need for collaboration and mentoring has also encouraged law firms to return sooner to the office.
There are also some companies that are now looking more closely at how much office space they’ll need in the future, Urban said. Many large companies are asking brokers questions about how to best use their existing office space. They are considering downsizing the space they are leasing or maybe moving to new locations. They are commissioning workplace studies and analyses.
Then there are companies that have already adopted work-from-home policies and remote strategies, Urban said. They are not considering major changes because they’ve already tweaked their office space needs, long before the pandemic hit.
And for now? Most of the talk about companies installing hybrid work schedules and shedding their existing office remains just that, talk.
“We have yet to see companies making those dramatic commitments to downsize their space and reinvent their workforces,” Urban said. “They haven’t signed those 10-year deals. We haven’t seen that yet. There has been chatter. But it’s not translating into major deals.”
Urban said that many office deals in general remain on hold. There have been short-term renewals. But for the most part, companies are holding off on making big office deals.
“Companies don’t want to sign that 10-year deal until they see how the rest of this pandemic plays out,” Urban said. “It’s better to play it safe and come back when they are ready to make those decisions.”
This leads to the big question: How will the office market and the way people work change after the pandemic? Will it even change at all?
Urban, of course, doesn’t have a crystal ball. But he said that he expects to see the office market go through a cycle where more employees do work from home, at least part of the time. But in the long run, most office workers will return to their office buildings, with many of them returning to this space five days a week.
“Some companies will make changes. Most won’t make really dramatic moves,” Urban said. “That will go along with how we move out of this pandemic. We won’t wake up one morning and go back to January of 2020. Joe Biden isn’t going to appear on NBC and say, ‘Hey. We are done.’ It’s not going to happen like that. It’s the same with the office market. There’ll be a period of three to five years during which companies need to fine tune their workspaces and work environment and get it right.”
Even without the pandemic, the office market will face challenges. For one thing, a demographic shift is about to occur in the U.S. workforce, Urban said. The Baby Boomer generation workers are nearing the end of their careers. They are starting to retire in greater numbers.
This will open the door for a new generation of business leadership with different work and leadership styles, Urban said. There’s also the continued growth of technology that will change the way companies use their workspaces.
The Gen Z workforce will also be smaller than the Millennial workforce, Urban said. That might pose challenges to companies as they battle for the best available workers.
“In talking to companies and human resources officers, I’ve found that the forward-thinking ones are concerned,” Urban said. “If you look at the number of high school and college graduates, it is going down. You can’t create more of this younger generation. Our demographics are our demographics. How will companies get the Gen Z workers to work for them? They’ll have to reinvent themselves.”
And in Indianapolis itself? Urban says that office market activity is still down from pre-COVID levels, which isn’t surprising. He’s also hearing rumblings from some companies that they might move from urban to suburban locations. But Urban hasn’t seen many companies actually make that move yet.
“We will probably see a greater number of three- and five-year renewals that will buy companies sometime before they have to make bigger decisions,” Urban said. “Some companies might go with small expansions to give people some social distancing. Overall, though, activity remains down a bit in Indianapolis. But it is starting to pick up.”
Urban has to look out of his office window to see this. Five month ago, he could park anywhere in downtown Indianapolis and still get to his office. Now as he looks out his office window, he doesn’t see an available parking spot in any direction.
“We are seeing more people back,” Urban said. “Are we seeing normal rush-hour traffic yet? No. But I will say that we are seeing life return.”