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Employees Are Being Called Back to the Office: What This Means for CRE

Published: 04-05-22 Category: General CRE

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The Great Resignation changed just about every segment of society you can think of, so it makes perfect sense that there would be ramifications for the world of commercial real estate as well.

Indeed, employees have been working from home for a variety of reasons, including for safety in the middle of the pandemic.

However, the post-pandemic era is definitely here; many states, including Missouri, are seeing the worst of the pandemic times over. Hospitalization rates are down, people are looking for a sense of normalcy, and companies are looking to get back to business with a return to office.

This makes sense: face to face interactions are the bedrock of company culture, and those big empty offices still represent carrying costs for businesses of all sizes. Juggling the lease on a building with no one in it is a waste of company resources.

Office Leases: Everything Old Is New Again

An office lease isn’t the most glamorous area of the CRE world, but it definitely deserves a lot of attention. It’s a great time to get office space, because property owners are looking to pull in new tenants.

People looking for tenants to fill in empty space left behind by businesses that have closed their doors or pivoted to a fully virtual environment will find plenty of opportunities.

The key, as always, is a little negotiation.

Know the Different Types of Office Space Before Moving Forward

The dimensions of an office space are important, but the type of office space involved is the real hero of the story. Knowing the differences between types of office space is critical not just for cost reasons, but for planning reasons as well.

Here are a few examples that you’ll find in the wild:

Traditional: this is the most common office space you’ll see; think cubicles, conference rooms, and cafeterias.
Creative: this space is all about open, airy spaces, group work stations, collaboration zones, and lots of space for whiteboards. Everyone loves a whiteboard.
Co-Working: this space is highly focused on fast collaboration, flexibility, and a lack of long term leases. Everything is included, which means the space is at a premium.
Executive: this space is more about taking co-working to the next level, with a strong emphasis on executive audiences.
Flex Space: Flex space tends to blend together some industrial space with traditional office space. Most production facilities have gone high tech and value having administration on site right along with the best of their production team.

Some buildings may try to blend features from different categories; generally speaking, go with the category that has the features you need for your company’s needs, or what your ideal tenant would need (as a leasing option).

The Good News for Office Occupancy Rates

Examining office property further is wise, given that office occupancy rates are on the rise. The National Association of REALTORS? noted that occupancy rates were pushing upward; with 84% of over 390 metro areas across the country experiencing a lift.

Here’s a few insights from their mini report on the topic:

Office asking rents are also on the move, with areas like Palm Beach and Providence experiencing the most lift (at 6.2% and 5%, respectively)
Tech metro areas are leading the way, with places like San Jose and San Diego in top spots for office occupancy. Tech companies are beginning to call in their talent back to the office. Apple and Microsoft are leading the return to office directive.
Dallas, Atlanta, and Houston are all major targets for increased office occupancy as well, at 3.36 msf, 2.6 msf, and 2.1 msf respectively.

While some employees are still holding out for remote work, the truth is that the post pandemic era is about companies trying to restore as much of the “old world” as possible.

Commercial real estate analysts should pay close attention to the movement of office space as it will change offers on buildings for sale as well as rent prices.

Why a Return to Office is Good for Property Owners

Even if you haven’t thrown the Great Resignation’s battle cry to the side and looked for a return to office, the reality is that owning property in close proximity to other companies going back to work is a good thing.

Many businesses, such as quick service restaurants and takeout spots, rely on worker traffic for revenue.

That sector took a beating in the marketplace once the ongoing flow of employees looking for a quick lunch out dwindled down to nothing.

Other companies thrive in commercial real estate when vacancies are brought under control. Let vacancies spiral out of control, and the rest is history (literally).

Dynamic Negotiation for Dynamic Times

The more vacancies in a market area, the more likely it is that property owners will make more appealing deals than when demand is high and supply is low. Not to bring back college economics, but this is pretty much the way it goes.

Tight demand and low supply is an easy powder keg for rising prices to become explosive prices.

The key here is dynamic negotiation, which always starts with knowing the lay of the land. What are the current rents in your area for office space? Break it down by type.

The more planning you put in, the better deals will come down the road. If that isn’t an old commercial real estate industry staple, it missed a great opportunity.

Working Through the Details for a Real Action Plan

Pulling up a batch of free commercial real estate listings and cruising down the list until something looks good is an odd way to pass time on a Saturday, but that isn’t the makings of a strong CRE strategy.

The better approach is to continue to get clear around the type of office space desired, the budget, the requirements, and the timeline for the project at large. Getting laser sharp on the details is never a bad thing; it can only help you find the best space for a growing business.

While tech giants and large corps lead the way in having employees go back to work, people within the CRE world would do well to see how to take advantage of this trend.

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