With the coronavirus pandemic having forced many millions of Americans to work remotely for nearly five months, a question has emerged which would have been unthinkable just last year: What is the future of office buildings and commercial real estate?
While there is a lot of uncertainty, one thing that real estate industry experts agree on is that it is a toss-up whether companies will ask their employees to return to offices if and when the coronavirus crisis is resolved. Some likely will, and some likely will not.
As Brian Zrimsek, an industry principal at MRI Software, which works with commercial real estate landlords, notes, technology developments achieved in just the last few years make it seamless for many people to successfully work from home.
“In 2000, Internet broadband operated at a mere fraction the speed that it does today,” he says.
If this trend continues, demand for commercial real estate will shrink. On the other hand, industry experts note that in the past 10 to 15 years, employers had already shrunk their office footprint, which has forced employees to work in closer proximity. This would suggest that as people return to their places of work, employers may in fact need more—not less—office space.
But a key consideration that 401(k) participants and other potential real estate investors need to keep in mind is that office leases typically lock employers into five- to 10-year time periods, notes Allan Swaringen, president of JLL Income Property Trust, a real estate investment trust (REIT) with $3 billion of assets under management. Because so many employers have a long-term lease, and because so many developments can happen over a period of even just a few years—let alone a decade—there really is no way to predict the future of commercial real estate, Swaringen says.
“Currently, 95% of commercial buildings are leased for the next five years,” he says. “Even if only 20% of the workers come back, office landlords will still be getting the cash.”
Swaringen says that his company surveyed its workforce, based in Chicago, and found that 15% said they would like to continue to work remotely, but 60% said they are not equipped to work remotely.
“The answer is not going to be clearly black or white,” he says. Swaringen certainly does not expect to witness “the death of office properties.”
Because many so industries function better through collaboration, Swaringen says this will be the primary reason why people return to physical workspaces.
Manny Ybarra, founder and president of Pillar Commercial, a full-service commercial real estate investment and operating company located in Dallas, agrees with this premise of people wanting, and needing, to collaborate.
“There is no doubt the office market is challenging in this current market,” he says. “While this near-term disruption will continue through the balance of this year, we remain confident employers will eventually come back to an office setting when this health crisis is behind us. Collaboration and culture are paramount to a company’s success, and that requires direct social interaction.”
However, experts foresee many changes in the way that people return to physical workspaces. Swaringen expects more companies will leave cities and move to the suburbs, where there is more room, it is easier to reconfigure an office’s layout, and people can drive to work, rather than rely on public transportation.
Goodwin Law has published a white paper, “Envisioning the New Normal,” on the extensive changes it expects office buildings to have make in order to reopen safely. Goodwin says buildings are likely to integrate technological solutions, such as one that can show office and parking lot capacity, handle reservations for limited numbers of employees and set up designated queues for when people can report to and leave work. Goodwin also foresees buildings installing no-touch technology at many locations, such as at elevator panels. Sensory technologies, including those that can monitor employees’ temperatures, are another possibility..
The law firm also expects HVAC systems to be adjusted to monitor air quality levels and to maximize the filtration and circulation of fresh air. Goodwin expects landlords to equip tenants and employees with information on building and occupant safety and contact tracing, and, last but not least, to enhance cleaning protocols.
Swaringen, who was co-president of the Defined Contribution (DC) Real Estate Council, notes that REITS focused on commercial as well as other types of real estate can provide diversification, quarterly dividends and an inflation hedge for 401(k) participants.
“In the U.S., $16 trillion is invested in commercial real estate, and that is half the market cap of the $32 trillion in stocks, and one-third the weighting of the bond market,” he says. “It is a very large investment universe and a significant component of the gross domestic product. But only 40% of all real estate comprises office space. Sixty percent is retail, apartments and industrial real estate, with each of those three accounting for 20% of the market.”
While asking about the future of commercial real estate is a valid question right now, Swaringen says, it is important to remember that real estate opportunities are diverse and of interest to both DC plans and to defined benefit (DB) pensions.
“We have been investing across many types of real estate and geographic markets to give our 17,000 high-net-worth investors a wide array of exposure to real estate for their portfolios,” he says. “So, I don’t worry about who will win in the commercial space. Medical offices are doing great right now, for instance, because of the increased demand for health care offerings outside of hospital settings.”