When I was in business school, many (many!) years ago, my strategic planning professor drilled into us one thing that clearly sticks out in my mind: “In business and in life, you have to adapt or you won’t succeed.” Wow, that advice seems more relevant now than ever.
To give some perspective, many of the major brokerages, such as CBRE Group, JLL, Cushman & Wakefield, Newmark Group and Colliers International Group Inc. each reported drastic drops in revenues and income due to the global pandemic. “The U.S. office market recorded 14 million square feet of occupancy losses in the second quarter, the steepest drop since the second quarter of 2009 during the Great Recession,” JLL reported in its U.S. office outlook.
In Denver alone, there was a 43.1% year-over-year drop in leasing activity in the second quarter, according to the real estate research firm Savills, the lowest activity level in 15 years. Vacancy in Denver grew to 13.6%, according to CBRE, with 33% increase in available sublease space. (DBJ 7/20/20)
Dan Meitus, President and CEO, Elevate Real Estate Services Inc. Incoming 2021 Denver Metro BOMA President
As a result of COVID-19, there were a number of significant impacts to different sectors of business, such as employers and employees, landlords and tenants, etc., that directly impacted the office market. Starting in mid-March, there was an avalanche of national, state and local information from a variety of sources. Organizations, like BOMA and Downtown Denver Partnership struggled to keep up and, in some cases, take a leadership role for their constituents. Daily briefings from the Centers for Disease Control and Prevention, White House and the media overwhelmed many of us in the industry trying to decide the best course of actions.
Companies grappled with what to do with their employees, while landlords and property managers scrambled to figure out how to adapt to make their buildings safe and secure. Businesses complied with the stay-at-home orders, and building managers implemented new COVID-19 procedures around increased cleaning and disinfecting, security, signage, mask-wearing, social distancing and health screenings.
“One thing that has clearly changed is how landlords communicate with tenants – they have to be more flexible. Furthermore, the role of property managers in communications is more important now than ever,” said Dave Hewett, executive managing director, Olive Real Estate Group and BOMA Fellow.
Over the longer term, the issue of ensuring the health and well-being of tenants will become more complex. For both existing and new buildings, property managers and landlords will be looking at technologies and products that address temperature checks, indoor air quality (IAQ) – including Bipolar Air Ionization, MERV (Minimum Efficiency Reporting Value), HVAC filters and outside air intake as well as touchless environments for building entry, security, elevators, bathrooms and lighting.
As “working from anywhere” became the new normal, companies found ways to get work done with everyone at home. Larger tech companies like Google and Amazon led the way. Technology like Zoom and Teams helped addressed the fundamental “3 C’s of Teamwork” (collaboration, communication and cooperation). However, companies soon realized there was a negative impact without the in-person interaction to mentoring and motivating employees and, most importantly, maintaining their unique company cultures.
Working at home did not provide the “serendipity of the office” environment that contributes to the vibrancy, productivity and excitement of being around other colleagues. As background, some service companies spend up to 80% of their budgets on human capital, while only about 5% on their rent, demonstrating the relative importance of happy employees versus saving a few dollars by working from home.
As buildings became empty, tenants asked landlords for rent abatement and rent deferment. Landlords realized that the long-term relationship was more important than the revenue adapted, but it varied greatly depending on the type of real estate. For example, one of my retail owners (in her eighties) with several restaurants that were either in trouble or up for renewal, wisely said “Dan, no one wants to negotiate a lease renewal when they don’t even know what tomorrow will bring.” Other owners were not so forgiving.
There is some data on the tenant perspectives on the future of office space. At the BOMA International conference, Brightline Strategies presented market research conducted among hundreds of commercial office users and tenant decision-makers on how the COVID-19 public health emergency impacted their businesses and attitudes toward their workplace environments. In their survey, 60% of tenant’s real estate decision-makers saw less value in physical space, and 51% will reassess their space needs for the future. Of those, 60% likely will reduce their footprint. Similarly, Gensler, the global design and engineering firm, said recently at the CREJ Office Summit that 70% of the tenants surveyed want to come back to the office as soon as it is safe, but definitely with some changes. Specific results depend on factors like the size of company, industry and culture.
The impact of the pandemic will not be fully realized for some time in the commercial real estate market. One thing that is clear though is that businesses, architects, engineers, landlords, brokers and property managers are all being asked to adapt more now than they ever before. Capital markets, new developments, lease terms and, of course, work environments will need to be more flexible to accommodate this new normal.
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