Twenty-seven months ago, we couldn’t begin to comprehend the length or severity of the pandemic, nor its long-term effect on commercial office space. Today it is still not possible to make an accurate prediction, but a few emerging puzzle pieces are helping to shed light on the competing markets.
A Look Back
We’ve looked at how to “virus-proof” the workplace, how we will react to going back to the office, and how we will act when we get there. Many have made the transition, yet many others are resisting. The possible migration back to office space occupancy, and for some the continued resistance to such migration, will influence how much space will be needed, how much it will cost, how much occupiers will be willing to pay, and which markets will be most affected.
Will companies treat the pandemic more than two years in as an opportunity to reduce the office footprint, thereby reducing operating expenses, and freeing up capital to invest more in technology? There may be an age-gap to take into account here as well. The broad shift to working from home will suit an older generation, but people at the start of their careers will be looking for formal training, interaction and collaboration with others. The consensus seems to be heading toward a smaller footprint in higher quality space. As long as individuals continue to be the greatest source of an organization’s profitability, landlords will need to find ways to differentiate their asset from others by offering modern, flexible office space with heightened services designed to enhance productivity and creativity. If the foregoing premise proves accurate, the better buildings will do well, and older buildings with poor ventilation and fewer amenities will struggle to survive.
What About New Office Building Construction?
Except in isolated circumstances, lenders and developers do not seem inclined to invest in ground-up development of office buildings. New office buildings under construction (or will be soon) are designed for an end-user that will occupy the entire building, such as Sherwin-Williams’ new international headquarters in downtown Cleveland, Ohio and its new research and innovation hub in Brecksville, Ohio. Welty Development Company broke ground on a new 150,000 square foot office building in Independence, Ohio that will be anchored by a 55,000 square feet lease with CBIZ. There are office building rehabilitation projects going on, but there are very few examples of new office construction in town.
Downtown vs. Suburban Office Markets – and the Winner is….
Undetermined. As stated earlier, making an accurate prediction is perilous; and the conclusions change depending on when the statistics are analyzed. In an article published in September 2020, Newmark addressed the relative attractions of downtown Cleveland versus suburban office locations, and concluded that the data does not reflect a significant shift away from the urban workplace. This may be due, in part, to the fact that office leases are frequently for a period of 5 – 7 years, and many companies were in the midst of a multi-year evaluation process, and therefore not in a position to commit one way or the other. The Newmark report concluded that vacancies in the downtown Cleveland office market had increased to 22.5%, and that vacancies in suburban office buildings had reduced slightly to 16.1%. The report does not give any guidance on how much of the downtown vacancy was affected by office space being converted to residential use. The analysts surmised that suburban office space is often less expensive, and also noted that access to free parking could also be a factor. With the costs of parking no longer a deductible company-level expense, downtown organizations have been forced to push the cost of parking to their employees.
This month CBRE published a report indicating that, on a national level, downtown office space recovery was lagging behind recovery in the suburbs. Asking rents and vacancy reduction in the suburbs increased at a faster rate than similar factors in downtown office leasing. As far as Cleveland is concerned, some speculate that the direction of downtown office leasing will not take shape until Sherwin-Williams completes and occupies its new 36 story building.
Key Takeaways for Office Landlords and Tenants
Data is emerging and, as of now, does not disclose a clear market leaning between downtown and suburban locations. Success in containing the effects of the pandemic, site selection criteria employed by tenant decision-makers, and the ability of landlords to offer the most desirable amenities will each significantly affect the outcome. It is equally unclear whether The Great Return will happen. While organizations are pushing employees for a return to the in-person workplace, employees have proven they can function in a remote environment and are likely to expect that the option of remote or hybrid work will continue. Absorption and vacancy in commercial office space, both downtown and suburban, will likely remain in flux as companies settle into understanding their long-term space needs.