10 Office Market Trends Emerging as COVID-19 Pandemic Wanes
by Lee Wagner, on May 10, 2022 11:24:17 AM
It’s been over two years since the World Health Organization declared COVID-19 a pandemic, and it has touched all facets of society, including how we work. We are beginning to see more U.S. companies bring more nonessential workers back into office settings in recent months. Still, the pandemic has led to office market uncertainty as companies traverse the complications of hybrid work, remote work, or in-office options amid labor demand and rising wages.
We’ll take a look at 10 trends that Site Selection Group is tracking as we advise our clients on developing and implementing the optimal workplace strategy aligned with their cultural and financial objectives.
1. Work from home continues to evolve
- Some companies are still uncertain about their future office space needs as they bring back workers on a hybrid schedule, while others sticking with remote work for now and still others are mostly back in the office full time.
- There is no consistency in any industry sectors or company types. We are seeing employers within the same industry taking completely opposite approaches to their workplace strategy.
- Due to challenging labor conditions, the work-from-home model has proven to be an extremely effective way to source talent; however, the long-term impact on culture, productivity, data security, and attrition is unknown.
2. Companies are downsizing their real estate footprint
- Companies need to carefully evaluate the cost-benefit of reducing or eliminating their office footprint to be much less than anticipated due to hidden costs such as the additional supervisory staff needed to manage remote workers, longer training time, down-time and costs of computer and technology management, and the implementation of more expensive software applications to enable remote working.
- The office hub is a popular strategy for remote employees across a metro area who have the occasional need for office space. We have helped clients set up a 5,000-square-foot hub office supporting 100-plus employees within a reasonable drive time.
- Workstation sharing is another strategy where employees come into the office on different days of the week, reducing the need for space.
Some companies are hiring fully remote workers located in other cities different from their headquarters location.
3. A glut of sublease space is disrupting and confusing the market
- According to the Costar Group, there are approximately 208 million square feet of sublease office space on the market led by cities such as New York City (29 MSF), Chicago (10.5 MSF), Dallas-Fort Worth (10.2 MSF), and Los Angeles (10.1 MSF), and San Francisco (9.4 MSF) with a significant amount of the sublease space in older, less desirable buildings.
- Although companies consider sublease space a low-cost solution, they are learning that a lot of the sublease space available simply doesn’t meet their needs.
- Companies also need to consider the costs to sublease space which include carrying costs while marketing the space, free rent to the new tenant, tenant improvement allowances, furniture given as a part of the transaction, brokerage fees, and the difference between your rent and what the subtenant is paying.
4. Demand is up for high-quality, newer office space
- The battle for talent has created a greater demand for higher-quality office space to attract prospective workers.
- Companies are wanting more collaboration space and training rooms as well as less dense working conditions with higher quality air circulation because of COVID-19 concerns.
- Higher quality amenities are also in demand to create a “live-work-play” environment.
5. Rental rates are holding steady
- Despite an oversupply of office space in many markets, landlords aren’t dropping rents although older buildings that need significant updating will experience more price pressure.
6. Tenant concessions are on the rise
- Even though landlords hold steady on rents, they are offering more concessions, including significantly more free rent and tenant improvement allowances to keep pace with inflated construction costs and longer construction times.
7. Supply chain challenges and inflation mean rising prices and extended construction timelines
- Companies are needing to start the site selection process much earlier due to the long lead time on construction materials and permitting.
- Companies should carefully manage their project budgets and conservatively allocate an additional 10% to 30% in construction costs.
8. Coworking and turnkey speculative office space is gaining traction
- Many landlords with excess space available in their buildings are pre-building turnkey suites with high-end finishes so tenants can quickly move in with less financial exposure.
- Coworking spaces continue to gain traction as companies seek short-term flexibility.
9. Companies are hesitant to make decisions
- Uncertainty over COVID-19 and the future of hybrid or remote work has companies hesitating to make decisions on their office space, essentially kicking the can down the road as they wait to see what happens with COVID-19 infections, wage inflation, and the competition for talent.
10. Shift to a tenant’s market
- Market uncertainty continues to shift negotiation leverage into the hands of the tenant, and tenants should have the upper hand over the next several years until the office market stabilizes.
- There will always be exceptions in certain cities and submarkets with limited supply that have recovered much quicker than others.
The office market is evolving and may never be exactly how it was pre-COVID-19. However, the impact of the pandemic will create unique opportunities for companies to be in the driver's seat during negotiations in the near term. It is critical to have experienced site selection and tenant representation experts to help you navigate this ever-changing market.