No commercial real estate sector has escaped the impact of the COVID-19 pandemic. That’s especially true of office. After all, many office buildings in downtowns across the country sit mostly empty today as many U.S. workers continue to work from home.
When will workers return to the office? And how many of them will come back to their cubicles or corner offices? No one knows the answers to these questions yet.
But the office specialists participating in the 2020 Memphis Commercial Real Estate Summit held Dec. 17 by REjournals.com and Midwest Real Estate News did share some hope: They said that while the office sector is in limbo now, there will still be a place for the U.S. office after the pandemic ends.
“We will never be at 100 percent remote work in offices across the counttry,” said Jeb Fields, principal with Cushman & Wakefield|Commercial Advisors in Memphis. “There is too much that happens in an office environment. You have collaboration and mentoring. You have the inspiration of ideas that we get through physical interaction. The lack of these is starting to manifest itself now that so many have been out of the office for an extended period of time. The flaws of working from home are starting to show up now as opposed to the first couple of months we were doing this.”
Fields wasn’t the only person expressing this sentiment. The panelists speaking at this event – led by moderator Caren Nichol, attorney at law for Memphis’ Evans|Petree PC – said that every sector, with the exception of industrial, is working through challenges today. But the panelists – Fields; Shane Soefker, principal with the Memphis office of Avison Young; Todd Glidewell, senior managing director with Memphis’ Valbridge Property Advisors; and Shawn Massey, partner with The Shopping Center Group in Memphis – said that there is hope: Vaccines are now rolling out across the country. An end to the COVID-19 pandemic finally seems to be in sight.
And that means that the healing for the U.S. economy and commercial real estate could begin starting sometime in 2021.
Fields said that uncertainty is strong today in the office sector. And that’s something that won’t change anytime soon.
“We are still trying to figure this all out,” he said. “The pandemic has hit everyone. It’s touched every facet of life. Everyone is trying to figure out how to get beyond it. Office hasn’t flown above the fray.”
Fields said that office occupiers are now facing a big decision: Should they downsize their office space or should they extend their leases and remain in their current locations as they wait for the pandemic to burn itself out?
Fields predicted that many companies will come up with innovative changes in 2021 and beyond. The way people use offices will change, he said, with many employees working partly at home and part of the time in the office.
“The big question is how much square footage these companies will need,” Fields said. “How demand for office space will there be in the post-COVID world.”
One big change? Fields said that the densification trend — companies fitting more people into less office space — will probably reverse itself. Many companies will open smaller, satellite offices so employees can work in locations closer to where they live. Many will rely on a hybrid model where employees work in an office when they need to meet and collaborate with others and work from home when they are focused on tasks that don’t require this sort of collaboration.
“I can speak for our 35- to 45-year-olds. They like the ability to flex,” Fields said. “They want an office to come to for certain tasks but they like the flexibility of a remote work option.”
Soefker with Avison Young agreed that the office sector will remain a viable one after the pandemic passes.
“Office is not dead,” Soefker said. “People liked to declare that early in this pandemic. But that’s just not true. We are moving into an exciting new era. Some companies will have some form of work-from-home policy. Employees won’t always be in the office five days a week. Those changes are unique to individual organizations, but there will still be a need for office space.”
The changes might align with the age of workers, Soefker said. He pointed to Avison Young as an example: The younger people at Avison Young would work from home five days a week if they could. Middle-aged workers with children and families? They might prefer working at home some days but coming into the office on others. It’s often easier for them to get work done when they have the quiet and professionalism of an office setting. Then there are the older, veteran employees. Soefker said many of them are creatures of habit. They are used to waking up and going to the office and don’t want to change that routine.
But no matter the age of the worker, employees do benefit from working in the office, at least part of the time, Soefker said.
“There is a strong need for collaboration,” he said. “You can’t replace that. Look at new and younger workers. It’s so important for them to be close to senior brokers and other senior people in the business. It reduces the amount of training you have to do. They pick up things by being close to people with experience. Everyone is taking the opportunity now to reassess their space needs. Some companies are reducing their overhead with uncertainty in the economy. But as we get into 2021, and the vaccine gets out, I think people will start moving back into the office.”
Nicol said that she is already pining for people to get back into her office.
“I want everyone back,” Nicol said. “I miss that water cooler talk. I miss that opportunity to exchange ideas.”
Glidewell from Valbridge Property Advisors said that it’s difficult today to value any commercial property type, including office. That’s because there is so much uncertainty in the real estate market and economy.
“The more people you talk to, the more opinions you get about how this all plays out,” Glidewell said.
Glidewell said, though, that his company hasn’t seen many rent deferments or concessions in the office sector. He said that Valbridge is talking with tenants and owners regularly to get a feel of how strong their cash flows are in the near term.
“It’s about trying to get a grasp of what happens beyond this pandemic,” Glidewell said. “We are not seeing a lot of uptick in cap rates. You can’t pull cap rates from 2019 sales, though, and apply them to today’s world.”
Glidewell said he hasn’t seen any lender hesitancy in the office sector, though. That’s largely because most occupiers continue to pay their office rents. The owners he has talked to are not seeing many of their tenants not missing rent payments, he said.
“For the most part, office has held its own,” Glidewell said. “We can’t ignore the fact that there is uncertainty, though. We are putting that uncertainty into our cap rates.”
Massey with the Shopping Center Group addressed the challenges faced by retail, a sector that has been hit particularly hard by COVID-19. Massey, though, did share some hope with his fellow panelists.
In his view? Many retailers are struggling today. But others are evolving to better reach customers during the pandemic. This includes restaurants that have boosted their delivery and pick-up services and retailers who have boosted their curbside and online services.
Massey said that retailers have been evolving for decades. There is always a new threat to retailers, and those that thrive accept that they must adapt to meet these challenges.
“People still love to shop,” Massey said. “COVID has accelerated some of the store closings that we were going to see anyway. It wasn’t the cause of these closings, but it did speed it up. It’s like with Amazon. Amazon didn’t kill retail. Amazon made retailers better. Retailers knew they had to provide a better experience and give better service. A lot of retailers today have moved to the omnichannel approach. So retail isn’t dead. It’s just different. It is going to evolve.”
Massey said that retail spaces will probably get smaller. Customers will look at TVs in a physical store, but they won’t leave with the set they choose. Instead, it will be delivered to their home.
“You can see that TV. You can feel it and touch it. The salesperson can talk to you about it. You can buy it,” Massey said. “But then it is delivered to your house. Retail has been the greatest thing for the industrial sector. All those fulfillment centers are retailers trying to get that last-mile delivery.”