The IU Center for Real Estate Studies hosted a panel discussion titled “Paradigm Shift: The Future of the Office Market” at their fall luncheon, which took place in September at the Embassy Suites Plainfield.
Sara Coers, Associate Director of the IU Center for Real Estate Studies and Lecturer in Real Estate at Kelley -Indianapolis, curated and moderated the panel. Panelists, covering a wide range of expertise in the field of office real estate from lending to research, included:
- Jeff Cartwright, SVP & Regional Manager, Commercial Real Estate, First Financial Bank
- Joshua Graham, Director, Cushman & Wakefield
- Samantha Julka, President & Founder, DORIS Research
- Bradley Metzger, Managing Principal, CRESA
- Jon R. Owens, SIOR, Managing Director, Brokerage Services, Cushman & Wakefield
Coers set the stage for the panel with a general overview of where things stand for the office market:
“For many of us, ‘the office’ has been considered the sole or primary place of work for most of our lives. Until recently, business professionals spent, on average, 90,000 hours of their lives in an office. But office real estate has the most challenging fundamentals of any property type in today’s market. The office market represents almost $109 billion of value, or 16% of the commercial real estate market in the US, across many owners. Trepp recently opined that office values have declined 50-60%, posing a multi-billion-dollar problem for our capital markets.
Prior to the COVID-19 pandemic, only about 7% of people with tele-workable jobs worked from home full-time, while that number is approximately 35% today. The pandemic may have accelerated remote work trends and exacerbated office vacancy issues, but office has been impacted for the last decade or more by dropping birth rates, H1B visa issuances, and workforce participation. Today, while executives are contemplating the impact of remote work on corporate culture and innovation, employees are increasingly seeking fully remote positions in a tight labor market. Even the President of the United States has office on his mind – he recently ordered Federal agencies to aggressively bring employees back to the office, due to only 25% of federal office space being in use. We are at an inflection point for office – how we use it, how we make leasing/occupancy decisions, how we make ownership decisions, and the impact of office on our capital markets.”
Given these challenges, Coers and the panelists set out to help the audience make sense of the current office market and what the future holds.
The discussion started with the current challenges facing the office market. Aside from the obvious impact of the pandemic on how people work, the impact of high construction costs, interest rates, and current economic conditions on property values were also noted. Julka illustrated one of the primary issues in the office market by surveying the students in the audience about their desire to work in the office as young professionals, which elicited a large positive response, and their desire to work in a beige cubicle with no office amenities, which resulted in no raised hands. It was clear that the change in how people work is a fundamental issue that has yet to play out fully across various sectors of office users.
When asked about which sectors are being hit the hardest, Metzger pointed out that geography and the size of a company play a large role in determining who is seeing the greatest disruption, noting that many legal firms are primarily in the office, as are much of the general workforce in the Midwest and Southern U.S., but that those in the Northwest tend to be working more at home.
Graham said that those in financial services, food and beverage, engineering, and architecture are returning to the office in larger numbers than those in other fields, particularly the life sciences and healthcare sectors, which are more remote-centric.
At the heart of the discussion, use and design issues and the interplay between these issues and how people want to work were discussed. According to Graham, proximity to the office and decreasing the commute is a big issue for many tenants. Metzger added that many larger companies are now breaking up their headquarters into multiple smaller offices, using a hub and spoke model to allow employees to decide where they want to work based on location and the amenities offered at each location.
Julka said that a diversified workforce will require new office designs with separate spaces for social connections, meetings, and recovery. She pointed out, though, that each person has a different idea of what will make going into the office “worth it” and each employer will need to keep their unique employees’ needs and goals in mind when thinking about how to attract employees back to the office.
The panelists all agreed that more amenities and newer, redesigned facilities will be required to attract and retain tenants. Metzger stated that more amenities are required now than in pre-Covid times, particularly in the Chicago area where he lives and works, saying that the “fun factor” needs to be addressed and that the “pre-Covid” office is not the same as the “post-Covid” office.
As the discussion turned to landlords and the issues they face from a leasing standpoint, Cartwright noted that the current lending market in office is extremely difficult. Tenants want more lease flexibility while landlords want long-term leases. He emphasized that communication is key to solving this problem and encouraged owners to communicate with their lenders. In addition, high interest rates are reducing loan origination and putting pressure on owners in terms of debt coverage requirements and liquidity.
The velocity of office sales has slowed dramatically, and this trend won’t reverse until the current uncertainty in the market ends and tenants are able to sign longer term leases, according to Owens. This stability will not happen right away, Graham pointed out, saying that hybrid work will become the norm, but the impact on occupancies and space utilization will not fully be seen until lease expirations and restructuring work their way through the market over the next several years.
To wrap up the discussion, Coers asked what will happen to the older office stock when owners are faced with high capital expenditures to cure obsolescence or dramatically reduced rents and occupancies. The consensus on the panel was that many office buildings too old or unable to be renovated will need to be demolished, with Metzger already seeing this trend in Chicago. A reckoning is occurring within the office market, and the panel foresaw continued uncertainty and upheaval as office as we have known it changes, with a movement towards modern, highly-amenitized offices and away from the old standard, as the world adapts to a new way of working.
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