We’ve been saying it for a while. There is no such thing as returning to normal. What will emerge from this pandemic is a new normal. Exactly what that will look like is anybody’s guess. But there are some clues that the pandemic has amplified.
If you are the Owner of Class A office space, that has become a hazardous occupation.
Existing deals are getting undone on a weekly basis. Back in May, Shopify announced that all 5,000 of its staff would be working from home permanently.
Last week, Pinterest Inc. announced it has terminated a 490,000-square-foot lease signed just last year. It’s a mixed-use development slated to replace the San Francisco Tennis Club near the company’s headquarters campus.
Pinterest’s agreement involved a one-time payment of $89.5 million in the third quarter of 2020 to break the lease. The termination means that Pinterest will no longer be liable for future minimum lease payments of about $440 million.
One of the largest law firms in Toronto made a decision which we don’t believe has been publicly announced to keep their lawyers working at home. They are planning to reduce their office space requirements by two floors in a Class A office building. The resulting savings are estimated at about $1.4M in leasing costs per year.
Moody’s Analytics estimates that the value of office buildings across the U.S. will fall by 17.2% in 2020.
A recent report from CBRE shows that on average, new leases are being signed with an average rent concession of 8.9 months of free rent in the second quarter of this year. That’s up from an average of 8.4 months of free rent prior to the pandemic.
Facebook announced that they expect half of their workforce to work from home over the next decade.
Suburban office parks have lost their luster for a variety of reasons, including a growing preference among younger workers for life in more dynamic urban centers than in sometimes staid and sleepy suburbs. And the rapid pace of technological advancement has made the need for many clerical and processing jobs and the real estate to house those workers increasingly obsolete.
These buildings are about as useful as the fax machines that you can still find hidden in the closets of some of those buildings.
Many companies chose to relocate their offices into the downtown core in order to attract a younger workforce that wanted to be located in an urban setting. So the trend was back into the urban core.
But today, if you drive around NYC, you will see that nearly 90% of office workers are not coming into the office. WeWork has about 2M square feet of empty space in NYC.
The folks at Twitter have told their workforce that they can work from home if they choose. When they do re-open, they expect to occupy only about 20% of their current office space.
Google announced a month ago that they would keep nearly 200,000 employees and contractors working from home until at least next July.
Is the office model dead? No. But the model for working is changing and companies are definitely going to reduce their footprint. They will reconfigure office space to include more meeting rooms, temporary offices and more configurable flex space for those times when collaboration is needed.
What we’re seeing right now is an acceleration of a trend, and a significant downward shift in the value of office space, not only the suburban office space, but also prime office space in the urban core.