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Office landlords brace for new normal in workspace demand

SNL ImageWhen white-collar employees finally return to the work spaces they left behind in March, the buildings they enter may have altogether different layouts and new safety features that suggest a possible paradigm shift in the corporate office market.

With states determining criteria for returning to work post-COVID-19, each market's reawakening will play out differently, but there will be fewer workers across the board as the first waves are limited to employees whose presence on-site is deemed essential. Those reentering office buildings in many cases will be working with greater distances between them an affront to the densification trend that has defined the office market for years. Open floor plans may be divided up where more personal space is required.

"I think the days of squeezing many employees into a shared office environment could become a thing of the past for some companies," Craig Leibowitz, director of New York research for JLL, told S&P Global Market Intelligence.

The possibility that social distancing requirements will offset the rising number of remote workers has captivated office market observers in recent weeks. On first-quarter earnings calls, office real estate investment trust management teams downplayed the assumption that remote work is the new normal. Zoom meetings do not match dedicated office spaces in their ability to nurture "creativity, camaraderie and collaboration," SL Green Realty Corp. Chairman and CEO Marc Holliday said.

"Count me out as someone who believes the future of work will be at home in a bedroom, with a laptop computer and spotty Wi-Fi connections, with family members doing video bombs," he said.

More questions than answers

Leibowitz said office landlords and tenants have been consumed in recent weeks by the reentry process. That includes negotiating their respective responsibilities for curating workspace that prioritizes worker safety while maximizing productivity. "There are probably more questions than answers at this stage," he said.

Many office tenants on both sides of the Atlantic will be rethinking their long-term office space needs in the coming quarters. Andrew Simon, a longtime New York City broker and executive vice president at Helmsley Spear, said the lockdown may spell the end for benching workstations and other collaboration-oriented space arrangements where workers sit in close proximity on an ongoing basis.

"It's hard for me to imagine that companies are going to be able to convince their employees going forward to sit in benching, which is one of the big design factors that was leading densification," he said.

A survey conducted by J.P. Morgan's Property Research Team in Europe found that 96% of workers, nearly half of whom had not worked remotely prior to the lockdown, were working from home, and 86% had been doing so for more than three weeks a finding that suggests the coronavirus will be "a potentially paradigm shifting event for office-workplace behavior." Of the 474 workers surveyed, 82% rated the remote work experience positively.

Workers are likely to support work-from-home policies even after the COVID-19 lockdown is lifted, J.P. Morgan's research team said in a note. "[I]t feels to us like offices are likely to continue seeing headwinds until a new norm is found."

Balancing act

Going forward, employers will want to be sure they have enough office space to make workers feel safe and comfortable, but they may be accommodating fewer employees overall, JLL's Leibowitz said. Striking that balance on a long-term lease office leases are often seven to 10 years will be a challenge.

"It is a pretty delicate balancing act because the overhead costs, not just for real estate but for talent in this market, are so high," Leibowitz said.

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This balancing act seems to have paralyzed the office market, for now. Leasing activity has fallen off precipitously since March, and renewals' share of the overall activity ticked up notably, according to data compiled by CBRE. Tenants are shying away from signing new leases.

Office space may emerge from the coronavirus pandemic with a blend of old and new trends a more "agile and nimble" hybrid of traditional, personal desk-oriented space and the coworking model that in recent years had undermined it, Will Bryant, a counsel in Ropes & Gray's private equity real estate team, said in an interview. Social isolation and remote working have, paradoxically, increased camaraderie among employees and their desire to "check in" on one another. Employees may come to prefer layouts that promote collegiality, even if each worker is assigned more space overall. And coworking players, who have spearheaded innovation in recent years, are best equipped to dream up new frameworks.

The lockdown may also be property technology's time to shine, Bryant said. New building technology might replace manual turnstiles and other risky, outmoded ways of entering and leaving offices, and allow operators to trace contact and manage population densities in buildings.

Burgeoning technologies, Bryant said, create "quite an opportunity for those that haven't invested in proptech to bring about some real forward thinking to help businesses and get back to a bit more stable working environment."

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