The Office of the Future… No One Knows.

Almost now 6 months ago, employees at many U.S. companies went home and did something incredible. They got their work done seemingly without missing a beat.  Well not entirely, as many firms had to navigate some new realities but over time figured it out with a few “bumps” along the road.

I was talking to an architect friend of mine about a project last week and happened to ask, “When was the last time you were in your office?” He didn’t hesitate. “I think I have been in twice since early March”.  He did mention over the last month a scattering of their over 100 employees have slowly migrated into the office a day or so a week but generally it has been shut down with everyone working remotely. He said there were some initial issues along the way in getting work coordinated and processes retooled, but he said that right now there is a very good and somewhat seamless process worked out, but he did say he and many of his work mates missed the interaction, social comradery and ability to exchange ideas face to face.

This sort of viewpoint was confirmed with other people I have talked with that have gone almost totally to working remotely and productivity was up close to pre-Covid levels in many cases but having to deal with kids who are home; isolation; slowed down responses; workflow coordination in many cases persist. 

None of them could give me any sense of when or how their offices will return to full or even part-time office work schedules and physical spaces to get to any semblance of what it was before. It’s a month-to-month call. It is just too fluid of a situation. It is just too early for many organizations to make any sort of long term decisions about how to utilize their office space in the next year and beyond.

This is being confirmed by some of the larger tech companies such as Facebook, Google and even Intel that is giving and mostly telling a bulk of their employees to work remotely into next year when there will be more concrete information about Covid’s persistence, vaccine and more.

But a high percentage of commercial real estate observers and those in the industry believe that this pandemic may have changed the traditional office environment on a more permanent basis.  It really hit home recently when I saw that the renowned long term outdoor retail purveyor, Recreational Equipment Inc. (REI), is looking to sell their brand new 400,000 sf office campus in Bellevue, Washington that they just moved into late last year, as they embrace remote working and a “decentralized” work environment.

The move to sell a new $100 million new office campus is a “shot across the bow” to other firms trying to figure out how they will utilize their space. As the CEO of REI related, “The events of 2020 has made us rethink many assumptions about how and where we work and how best to accomplish our goals. Large aggregated office spaces are not necessarily the best or most healthy way to accommodate our people” said REI’s president. While this may be an early “one off” sort of event on the part of larger companies reconsidering the most tech heavy larger collaborative office buildings and campuses, you have to think there will be a few more to follow. 

There is more press and stories about how the office environment may permanently change, with many prognosticators offering that many firms will look to size down (and in some cases totally abandon) their office footprints for more disbursed sorts of networks over the coming years to better reflect the lesser need and safety to have their workers consistently working in close quarters. But already there are some cracks in this thinking with many companies and organizations pushing back against this this “new normal”. There is some growing thinking and facts that projects take longer. Training is tougher. Work processes more lengthy. Hiring and integrating new employees, more complicated. Company culture and creativity eroding.  Some employers say their workers appear less connected and bosses fear younger professionals aren’t developing at the same rate as they would in offices, sitting next to colleagues and absorbing how they do their jobs, asking questions and increasing their knowledge of the company’s philosophy, brand and milieu. While necessary for safety right now, remote or disbursed work may not be for everyone the long-term preferred solution once the coronavirus crisis passes or at least lessens substantially.

“You can tell people are getting fatigued with remote work.”

“We are really a face-to-face business. I don’t think offices are dead or can they be. We need to be together.”

“We are trying to have our employees work from home. But it is just not the same. You cannot get the same quality of work. Teams physically building a product need to be together.”

“It is important to have people in a room and see body language and read signals that come through on a screen. Especially if you are a start-up there is a thrill about a hacky group of people on a shared mission eating pizza and bouncing ideas off each other. You can’t do that on Zoom.”

“I am concerned that we somehow believe that we basically can take kids out of college, or new employees, and put them in front of a screen and think years from now they are every bit as productive and as they would be had they had personal interactions.”

These are just a few statements I have gleaned from my internet search of the future of office space. But of course the extent of the value of having gathered office environments will depend on the type, size and scope of your business where a service organization may find remote work more workable than a company designing or building certain products needing to have people work and collaborate together.  Whatever side you fall on in the thinking of the future of office space, and even if a vaccine proves to be extremely successful, almost everyone believes that the nature of office space work environment will change to some degree far into the future.  And most of these effects do not bode well for the future of office commercial real estate.

The workplace zeitgeist of the past two decades, starting mainly with the dotcom boom, is the embrace of the open floor plans with less private offices, break-out rooms, interior phone rooms, and basically a diminishing amount of square footage per employee falling consistently for 20 years now, to now under 200 sf per employee. More people in less space has been the trend, which now organizations may find to be a petri-dish of unnerving health conditions, vaccine or no vaccine.

The future for at least the next couple of years will be group or shared desks ‘Out’… disbursed desks, sneeze guards and cubicles ‘In’. In-house cafes, food service and shared kitchens ‘Out’… Grubhub, Uber Eats, or no food consumption at all ‘In’. Everyone coming in every day working 9-5 ‘Out’… alternating days for employees coming into the office ‘In’.

And most importantly I was told by a local CEO… regular rapid testing of every employee. Then throw in more cleanable surfaces, non-touch handles and switches and motion-engaged amenities, enhanced air circulation filter systems and regular weekly total sanitizing of spaces and you have a new office paradigm.

Where are we now you ask in the commercial real estate office market in Portland? Basically a big…PAUSE. It is just too early to tell how businesses and organizations will look to make any moves in the short or mid-term, and with most office leases going out multiple years, there is not really much flexibility, except for maybe discussions about some deferred or short-term rent with landlords in the short-term, or more seriously, putting all of some of the long-term space up for sublease into a much diminished tenant pool which we are starting to see.

While some office deals got done early in the year before the pandemic hurricane hit, many firms and organizations that were out looking for space and were either reviewing options, or in active lease negotiations, have mostly pulled back to understand better their future space needs in relation to their future “book” of business, the desires and safety of their employees, all while analyzing and understanding how successful remote working has been and can be long term.

If they see their client’s needs diminish, or sales put on hold or potentially faltering, push back by employees not feeling safe or wanting to work in aggregated spaces, then how remote working can be successful taking on new or expanded space usually at higher lease rates, is understandably not a prudent move in such uncertain times.

Then those organizations that still have favorable futures may put searches into neutral to maybe garner better rates and more incentives from landlords that get aggressive for a declining amount of qualified tenants.

Tech companies seem to be the most immune and, per the stock market, are mostly still going strong, so they may be the bigger, or only fish in the office market pond going forward. With chip maker Ampere doubling space into Tanner Creek from the Fields, and rumors of Microsoft looking for a chunk of space (50,000 sf, but mainly in the burbs), being examples.

That brings me to another thought – That given Portland’s consistent and rancorous civil unrest (mostly downtown) shutting many retail and food amenities and creating a more unsafe feel, and the fact that core office properties are in a more dense environment might not be the place to be, thus giving more fuel to the attractiveness of suburban projects and locations.

This is especially the case if the coveted qualified millennial employee who wants the cool urban city environment which has been the case for the last decade, now sees this as not a big attraction, and in Portland right now, unsafe

This has recently been substantiated with the recent announcement that the Standard Insurance Company – a decades-long mainstay of downtown – is taking a large portion of their employees out to Hillsboro, as more protest-based than virus. They said temporarily, but really?.

There are also rumors that Google, which took a chunk of downtown space last year, has stopped construction of the tenant improvements in order to “reevaluate” their space options in Portland. This movement out of the core can also be greased by lower rents of more than 25%; more, and free, parking and many suburban locations and towns now having some rather desirable food/beverage; fitness; mass transit amenities.

Portland’s office market going into the virus was already experiencing creeping vacancy rates, quarters of net negative absorption coupled with considerable new product coming on the market (600,000 sf) in 2020, so Covid effects now provide even more uncertainty and looks to squeeze the hose of new demand for the coming year for an increasing amount of space.

So given this, it is not hard to predict that vacancy rates will rise; incentives will increase; rents will flatten and may fall back slightly and proposed new office developments will stall.

While sublease availability remains stable from previous years, this undoubtedly may increase as we move to the end of the year with firms such as Vacasa, who put close to 40,000 sf up for sub-lease in the Pearl, being joined by other firms maybe looking to let go of space to downside or move.

Not to be too much of a “Negative Nancy”, there are some glimmers of hope out there for Portland. Firms that now occupy spaces in larger, more dense, cities that have been a bit more hammered by the virus than we have may, and already are, looking to second tier cities that have all the amenities and transportation connections their company and employees need and want, might get some new attention for many operations of firms looking to disburse “nodes” of workers to more healthy locations.

Though Portland has definitely become more expensive over the last decade and more, our apartment rents, home prices and office rents are cheaper than almost all major cities on the west coast. Plus our talent pool which has been a lament for many firms for moving here has improved dramatically. Throw in our “natural and clean” brand, presence of some good health care institutions, quick and easy access to many beautiful outdoor and recreational options and we may stand to get more of a look, but what will mostly, I believe, be more footloose tech users. 

It has already been happening over the last decade, but may pick up the pace, and as mentioned below that interest, and any signed leases, may not be as much downtown, but more in suburb locations or neighborhoods outside the core.

Will it be big 200,000 sf or more deals like you see in the Bay area or Seattle, or will be like it has been recently – more 20-40,000 sf sort of needs of certain independent aspects of larger companies, but hey we will take these “singles” to move runners around the economic development bases. Hope I am right. The second half of 2020 will set the tone for the coming years as firms and organizations make more permanent decisions about their office footprints and how and where they want to operate.