Culture Clash: Corporations Are Changing, Putting the Future of Office Space in Limbo

It’s time to talk about fallout.

‘Agility’ was on the mind of real estate executives before the COVID-19 outbreak.

But the global pandemic accelerated the trend, leaving investors to think beyond coworking and shared space.

Now, the focus is on how to value and finance office buildings where tenants seek shorter leases and smaller footprints to slash costs, as employees telecommute and increasingly demand workspaces close to home.

What’s next/? That was the question for industry executives on CBRE Group’s podcast, The Weekly Take.

“Let me cut to the chase here, and I’m going to use one word: culture,” said host Spencer Levy, CBRE’s senior economic advisor and chairman of Americas research. “If you have short-term space employees, who were never in the office together, how do you create the culture for your company that … gives you a competitive advantage?”

The future of corporate culture is an important variable for real estate professionals trading in commercial space, as the “new normal” took millions of workers out of offices, under shelter-in-place orders intended to curb the spread of the coronavirus.

“In some aspects, having flex in your building can make your building more attractive to tenants, and arguably impact the value,” said Christelle Bron, a structural engineer who leads CBRE’s agile real estate practice in the Americas. “In some other ways, definitely the industry is figuring out that specific flex space. What should the cap rate be? Will there be an impact on it?”

In the wake of shutdowns to fight the virus, short-term cash flow into office buildings is a concern for lenders. But Bron seemed optimistic the office sector could adapt.

“This is still in flux, but this is something that the hotel industry has been able to solve,” she said. “This is something that the multifamily residential rental industry (has been) able to sell.”

Manish Kashyap, CBRE’s global head of advisory and transaction service, agreed.

“The option of working from home, or the option of working from other offices is only an option,” Kashyap said. “Companies will continue to want people who come back to the hubs in some manner or form. So this is all about optionality. … This isn’t a binary conversation.”

The good news: Industry research suggests the changing demand could benefit the sector.

“One thing we see in the numbers is that the cities in the United States that have the largest inventory of flex space, like cities like San Francisco or New York– with 4%, where in most of the other cities (its)  2%–you see it, because they have a very low level of vacancy,” Bron said. “And good luck getting any expansion or contraction option from any of the landlord. So companies are landlocked, they can’t sign short-term leases, and they’re flocking. And the demand for flex space is there.”

But the pandemic hit just as some firms appeared to be moving from telecommuting and flex space, and returning to traditional offices to foster collaboration, build team spirit and increase productivity. Tech companies seemed to be at the forefront of this trend in the last few years, Levy said.

But a new shift–in the opposite direction– unfolded in the wake of COVID-19, leaving investors and lenders to juggle tenants’ headcount volatility.

“Real estate is an exercise. And portfolio strategy is an exercise of matching the supply with the demand,” Bron said. “It’s an exercise of butts in seats. And the more the number of butts is changing, … the more difficult it is to adapt, especially when you sign 7-, 10-, 15-year leases.”

Related: Why Offices Will Be So Important For London Law Firms Post-Pandemic