By: Brian Jenkins and Mike Conger
The pandemic has forced a dramatic change in personal and professional habits as employees moved from office cubicles to their own kitchen tables for remote working. Clearly, this will have an impact on the office sector – but what will it be?
San Diego’s commercial real estate owners will likely see both short-term and long-term effects stemming from the growth in remote working during the COVID-19 pandemic, according to a report by Green Street Advisors. One the one hand, we may see a decline in the need for office space as more employees work from home (“WFH”). Conversely, we may see growth in the need for office space due to an emerging trend toward spreading out employees to allow for social distancing, according to Green Street.
At Commercial Asset Advisors, we have been assisting our clients in navigating the future of their office investments throughout San Diego County – in University City/UTC, Carlsbad, Chula Vista, National City, Mission Valley, La Mesa and beyond. Clients have asked us to analyze the current value of their office properties, determine how the market is being affected and advise them on selling, buying and leasing decisions. In some cases, CAA’s clients have determined that now is a good time to put a property on the market. In other situations, clients have adjusted leasing terms, invested in physical improvements (like improvements to HVAC systems) and made other changes to adapt to the new environment. Looking at creative and inexpensive ways to offer smaller spaces with more flexibility is a winning strategy.
There are two things that make San Diego’s office environment unique, compared to many of the cities mentioned in the report. First, the size of the average lease makes a difference. The average office lease in San Diego is relatively small – a few thousand square feet – and in our experience, smaller teams and companies are less likely to feel the need to downsize. These teams feel more comfortable working together with their smaller team. This makes San Diego much different than, say, San Francisco with its behemoth tech companies, or the large financial and legal firms that dominate New York. Second, San Diego has always had a rather unusual traffic pattern compared to most big cities. There is as much or more traffic going OUT of downtown as there is going INTO downtown. This report alludes to the suburban office market improving, at the cost of downtown office. However, in San Diego, only around 12% of the total square footage of office is in Downtown, and we have multiple other areas known for the density of office – think UTC, Kearny Mesa, Carlsbad, Sorrento, Rancho Bernardo. So the trend bigger cities are experiencing, with a shift from urban to suburban and rural life, is less impacted here in San Diego.
Pandemic Disrupts Office Life
Today, more offices across San Diego County are sitting with some empty desks and some tenants have begun looking at ‘right sizing’ yet again – in some cases smaller, in some cases bigger, but with less communal space. Insurance agents, managers, customer service agents, mortgage lenders, government workers, and even television reporters are capable of doing most of their daily tasks remotely.
Green Street assumes that a significant number of workers will be capable of continuing to work from home, at least in part, after the pandemic. “The forecasted impact is modest: most employees will still work in the office daily, with a notable increase in those who go to the office regularly but not daily. This will likely cause a notable reduction (10-15%) in overall office space needs going forward,” the report states. However, we’re not sure how that will take shape in San Diego, particularly if schools do not reopen completely. After all, working from the kitchen table while the kids are “remote learning” behind you is easier said than done.
Spreading Out More
In recent years, we have seen employers squeezing more employees into smaller offices in order to shrink space needs per employee by more than 20%. The COVID-19 pandemic is causing employers to go in the opposite direction with a new trend called de-densification, Green Street says. The idea is to reduce the risk of transmitting the virus among employees by spreading out desks, cubicles and workstations to allow for social distancing.
A shift toward de-densification could prove a boon to office demand, according to Green Street. The trend could be short-lived but “investors should remain open-minded about a de-densification trend as this reversal could have material positives for the office sector,” the report states.
New Expenses
In addition to impacting demand for office properties, the COVID-19 pandemic has also resulted in new capital expenses and management costs. Owners must invest in enhanced security and sanitation, Green Street notes. Businesses are installing Plexiglas barriers and paying to installing more barriers, cubicles or doors. Many businesses are paying for hand sanitizer dispensers, increased janitorial services, and personal protective equipment including gloves, masks and face shields. Other new trends include HVAC system improvements and anti-microbial coatings on surfaces. All of this puts pressure on the cost side of the business.
Monitoring the Market
No one has all the answers, but we do know that the office sector will continue to evolve during the pandemic. As our society continues this vast WFH experiment, CAA will continue monitoring the market and its drivers to provide up-to-the-minute advice to our clients.
Interested in learning more about commercial real estate trends and how they impact your investments? Contact the CAA team for a free property assessment.