As employees continue to work from home, leases are running out and corporate office space is in jeopardy. Managers around the world have to decide if it’s more efficient to keep their offices open, downsize, or go entirely remote. Seven months into this pandemic, the question remains… is working from home really going to stick? How is the commercial real estate industry handling the move to remote work spaces? Can professionals truly replicate the “sense of space” that comes with collaborating in person… from home? And five years from now, what will the typical workday look like?
- Steve Garrity – Vice President, Highwoods Properties
- Nick Poole – Managing Director, JLL
- Yvonne Baker – Regional Managing Partner, Franklin Street
- Bill Moss – Director, Dr. P. Phillips Institute for Research and Education in Real Estate at UCF
- 2:34 – The state of commercial real estate pre-COVID
- 4:25 – The rise of the open offices
- 9:19 – How the pandemic is changing office space
- 12:07 – The importance of “a sense of space” in collaborative work
- 13:44 – How working from home affects company culture
- 18:30 – Will companies downsize their offices? Eliminate them entirely?
- 23:04 – Permanent fixes for temporary problems
- 25:27 – Will everyone be back in the office in two years?
- 28:01 – Dean Jarley’s final thoughts
Spooky Voice: Submitted for your approval: a man gets up every day… he gets dressed, he drives to work, he interacts with 10,000 students.
Paul Jarley: Well, hello there. Welcome to The College of Business.
Spooky Voice: The year is 2020 and Dean Paul Jarley has entered …
Paul Jarley: Hello? Is anybody here?
Spooky Voice: The Twilight Zone.
Paul Jarley: Tina? Tiff? Josh? Anybody here?
Paul Jarley: This show is all about separating hype from fundamental change. I’m Paul Jarley, dean of The College of Business, here at UCF. I’ve got lots of questions.
Paul Jarley: To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? On to our show.
Paul Jarley: Seven months into this pandemic and the UCF College of Business is largely empty. Office occupancy can’t be greater than 10%. Many of my employees don’t want to return to work. They tell me they can get their work done from home, just fine.
Paul Jarley: It makes me wonder what I should do with all this space, but I have to admit, I’m not really sure what I’d turn it into. Maybe an apartment for me, so I never have to leave work? Perhaps dorms for students? Maybe, I could lease it all out to Amazon as warehousing space? I’m not really sure.
Paul Jarley: To help me think about the future of office space, I’ve assembled a panel of experts. Listen in.
Paul Jarley: If anybody can remember what life was like before March, could you talk a little bit about what the trends in class A office space has been, over the last few years? What have been the major trends that you are all seeing?
Paul Jarley: Bill, do you want to kick us off?
Bill Moss: So, everything was fine while I was still in the industry at CBRE. Since I left, it’s all gone haywire.
Paul Jarley: Bill Moss was the managing partner of CBRE. It’s the largest commercial real estate brokerage company here in central Florida.
Paul Jarley: These days, he’s the director of the Dr. P. Phillips Institute for Research and Education in Real Estate at UCF.
Bill Moss: Maybe Steve could kick things off with really, what he sees from the front lines, maybe over the last couple of years, but certainly since March as well.
Paul Jarley: Yeah Steve, chime in.
Steve Garrity: Yeah, I’d love to. Thank you, Bill.
Paul Jarley: Steve Garrity is vice president of Highwoods Properties, a real estate investment trust. He’s in charge of acquisitions and development for the company’s Orlando division.
Steve Garrity: Certainly on your watch and before COVID, the economy was humming. We were all enjoying vacancies going down. Our occupancy was certainly going up and quality of our customers was improving. Reno rates were increasing.
Steve Garrity: Before COVID, class A office space was under 10%. Before COVID, we were very confident and excited about the future, before March 17th.
Nick Poole: Yeah, I’m happy to add to that.
Paul Jarley: Nick Poole is managing director at JLL, the second largest real estate brokerage firm in the world. Nick is also a graduate of our real estate master’s program at UCF.
Nick Poole: As a disclaimer, typically, I’m working with more of the user and the tenant.
Nick Poole: Yvonne and Steve are more so working on the ownership side, or landlord side, but just maybe a couple things about space design, because I’m sure it’s going to come up a little later in this conversation, working from home, or de-densification.
Nick Poole: I can tell you that the trend over the last 10 years has been, for companies to move towards a more open, more efficient space design. The result of that is that, space per square, per employee has been driven down, right?
Paul Jarley: Yeah.
Nick Poole: Some of the most aggressive build-outs that we’ve been seeing, whether that’s call center, or whether that’s open technology bench type seating, those would probably allow for less than 100 square feet per person.
Nick Poole: In Orlando, what we were seeing a lot of, pre-COVID was, the move to a more open plan, some place where companies could maximize their efficiencies and put more people into less space, ultimately.
Nick Poole: There was a whole variety of different factors that came along with that. Did they have enough parking to accommodate the densification? Did they have enough open and collaborative areas to encourage collaboration and communication for their employees? That type of thing.
Nick Poole: But, there was a lot of emphasis on that, pre-COVID. Obviously that’s going to be a big question about what’s going on, moving forward.
Paul Jarley: Yeah Nick, I would think so. I will tell you though and if I remember right, Bill was an early mover on this in his own office at the time, but I know we’ve done this in some offices at UCF and in general, people hated it. They hated the open design, particularly the older employees.
Nick Poole: I would tell you that, depending on your industry, there’s mixed reviews about whether, or not folks like the open office. I do think a lot of it depends on your industry for one, and obviously your age and demographic probably comes into play as well.
Nick Poole: But, I can certainly tell you, when we were out representing, call it Fortune 500s, or even local companies, when they were looking for space, the trend up into the beginning of this year was, we’re looking for open plan, we’re looking for lots of light, we’re looking for exposed brick and beams, some type of industrial feel, something a little bit different, creative. All of those things were of uber importance, before this pandemic.
Paul Jarley: Why did industry play a role, Nick? Can you give me an example?
Nick Poole: Sure. Like a technology company for instance. The technology companies value the ability to be in an open bull pen type setting, where they are working in small teams or groups, and they’re able to talk to the folks across the desk from them, or they can pick up their laptop and move into a conferencing area, where they can have a training team of call it 10, 15, 20 people all together in a seating area, versus being in a private office like I’m in right now, with my door closed, and not being able to go out and communicate or collaborate with those folks.
Nick Poole: In my position, as a broker in a real estate industry, I work on a team. I’ve got four or five other folks. I’ve got a brokerage administrator that helps, and we’ve got a research and marketing team as well.
Nick Poole: I will tell you that, I think our productivity was better when we were open and together and around each other, where we could hear each other’s conversations, build on those things, were more aware of what was going on around us. I think in that instance, it actually helped, and probably helped our team be more productive.
Nick Poole: There’s an argument whether, or not that carries over across the number of industries, but there is a time and a place for it, for sure.
Paul Jarley: Yvonne, what trends had you been seeing?
Yvonne Baker: I think it would be very similar to what Steve and Nick have pointed out.
Paul Jarley: Yvonne Baker is regional managing partner at Franklin Street, a real estate firm based in Florida. She too is a graduate of our master’s in real estate program.
Yvonne Baker: On the landlord side, we definitely saw every client that came through here wanted an open plan. I think that historically, what we saw through different periods of time is, office buildings would be built based on how a developer wanted a building to be built. The developer would say, “Hey, here’s this really cool office building, tenants. Come lease what I have built for you.” Not a whole lot of consideration given specifically to what the tenants wanted.
Yvonne Baker: Then, we’ve gone into a period of where the tenants have said, “This is what I want, Mr. Developer.” They’re developing buildings in that way. I think with this pandemic, we’re going to see a bit more of a shift, which is where the employees are saying, “Mr. Employer, tenant, this is how I want to work in my office space. We’re going to see a whole lot more flexibility in how office space is used.
Yvonne Baker: We did a pretty large renewal for a law firm in our office building and they went some open and then left a lot of private offices for the senior attorneys in place, but with a completely cool, updated, open ceilings feel to everything. It was a lot of flexibility in how the spaces are being built now. I think we’re going to see even more flexibility as we go forward.
Paul Jarley: I guess if I think about the pandemic and the fact that I hear a lot these days, people questioning whether, or not they need office space anymore. I think really, the underlying question is, what’s the value proposition of having an office?
Steve Garrity: If you don’t mind, this is Steve.
Paul Jarley: Yeah, go ahead. Yeah Steve, yeah.
Steve Garrity: I think Nick and Yvonne pointed it out clearly. It’s the thirst, the desire for collaboration. There’s a lot of value associated with getting humans, workers together. I think that’s why the drive has been towards having an open plan, is really for collaboration.
Steve Garrity: In doing so, the increase in technology that’s occurred, just over the past eight months, many companies have really shifted their gear towards higher technology and better communication. But the desire to really be together and collaborate I think is a big thing.
Steve Garrity: Yvonne pointed out the flexibility and the efficiency. There are some limitations certainly, working from home. I think we’re all experiencing it as we speak, in that it’s again, lonely, so the collaboration doesn’t occur as easily as it should. It’s a new way of language and working that we’re all getting used to, but there is fatigue associated with it. The dust hasn’t settled.
Steve Garrity: I think we’re all learning through this COVID time, but I think to answer your question, it’s really human nature to want to be with others, so we can collaborate and really add value to the company.
Paul Jarley: Other people have thoughts on that?
Yvonne Baker: Yeah, I’ll jump in there. Consistently, we were seeing that our firm relies on the collaboration as Steve said, critically important, like in a sales brokerage operation, but also having the innovation together, having those accidental bump in meetings in the hallway.
Yvonne Baker: We work in a completely open environment here at Franklin Street. We have two private offices. In building a firm, it was critical for us to be open, so that we could hear each other, understand how we could team with each other, collaborate with each other, pass business around to each other, and seize opportunities sitting in the office together.
Yvonne Baker: That is gone, those accidental meetings in the hallways, when people aren’t together. That’s been our big part. At this point in our office, we have just two people who aren’t back in the office and pretty much everyone is back in the office at least four days a week, because everyone wanted to get back together, worked much more efficiently together, but still had that flexibility to work from home every now and then when we want to and not be afraid of that and not thinking that somebody thinks you’re not working.
Yvonne Baker: We now understand that people are working at home for heads down, task-oriented work, and coming into the office for more of that collaboration.
Paul Jarley: Yeah, I think that’s an important distinction Yvonne. I do think … Well, to Steve’s point, I think we’ve all experienced Zoom exhaustion. At least I used to have a break, because I would have to walk from one place, to another to have a meeting. Now, I just have them back, to back, to back.
Paul Jarley: I think it’s also really difficult to have productive informal conversations via Zoom.
Nick Poole: Yeah, agreed. Yeah, I think the thought is that, physical space, you need it, in order to get your people together, right? That’s where the social interaction, the communication, collaboration, all of your information flow is going to occur. Even more so in our industries, mentoring is a big deal. Mentoring and the ability to train somebody, I think is way more difficult to do over a Zoom, or some type of social media type setting.
Nick Poole: Whereas, sitting down with somebody, going out to lunch with somebody, having physical conversations with somebody, watching over their shoulder, on the job type training, those are really important.
Nick Poole: I think it’s not only important for the development of a person within your organization, but it’s a contributor to establishing a company culture. I think that is what most large, Fortune 500s are concerned about, with allowing their people to work from home all the time, or going completely work from home.
Nick Poole: The company culture is necessary to foster innovation, but more so, it’s important to retain your employees and also recruit other professionals. If a company is going to grow and if that’s their desire, to grow, whether it’s revenues, or as a company as a whole, recruitment is necessary. I think that will be the silver lining of having physical space at some level.
Paul Jarley: Nick, that’s the thing I worry about the most, here at the university, that the longer the faculty and staff are working from home, even though they’re all really trying to get their jobs done as best that they can, that they’re going to lose touch with the mission.
Paul Jarley: Universities are really special places, that involve a lot of that kind of social interaction. I am concerned the more they’re removed from that, the more difficult it is to maintain the culture and sense of purpose that people have.
Nick Poole: Look, it’s not just universities, right? I jotted down a couple notes here too, just some research that we put out. A few firms that we’ve interviewed, Goldman and Sachs, Morgan Stanley, Netflix, Facebook, Google, they have all commented back that their respective firms plan to have the majority of their employees continue to work out of physical offices.
Nick Poole: That runs the gamut, financial, technology, some that have been around for a long time, others that are new firms. There’s mixed emotions about that, but I think as we’ve gone into the 6th and 7th and 8th month of COVID, people are realizing that, it is an important thing to continue to have, at least on some level.
Nick Poole: A lot of these firms are going back with the majority of their employees expected to come back into the workforce as well, and work out of a private office.
Paul Jarley: Is it really then, in your minds, just overcoming the fear factor? Do you think once fear of COVID declines, that we’ll see people flock back to the office?
Nick Poole: My personal opinion is, our offices have been open since the second week of June, limited capacity, starting at 25%, up to 50%. Now, we have a seat for every one of our producers and admin staff, if they want to come in and work from the office.
Nick Poole: I’ve been doing it since early June, and I can tell you from my own personal opinion, I don’t have a problem with coming into the office and working here. I feel just as safe working here, as I would out of my house. I walk to lunch. I go have lunch. I do a lot of those things, with precautions. Being spaced out, with a mask, all of those things that we’re doing.
Nick Poole: I think folks that have been given the option to work from home, who haven’t experienced that yet, or like my mom and dad, who live up in Maryland and don’t have the option to go out and travel around, there is this pent up … I don’t know if it’s frustration, or concern, or fear that, you can’t just go out and do those things any longer. I do think that’s contributing a lot to it.
Paul Jarley: Other people’s thoughts?
Yvonne Baker: To tag onto that, the inconsistent messaging that we get through the media is a concern to a number of people, the few people especially that haven’t come back into our office. They’re just very uncertain as to, do the HEPA filters really work? Do the HEPA filters don’t work? It’s like every day, it’s a different story.
Yvonne Baker: Are we supposed to be sheltering in place? Are we not supposed to be sheltering in place? Just the inconsistent messaging makes certain people who are already uncomfortable or confused, peg that on as an additional reason not to come in. They don’t know, so they’re not coming in.
Yvonne Baker: I think that inconsistency is the part to play with a few of the people that we have.
Paul Jarley: Yeah, I’ll tell you Yvonne, here, and I don’t mean to make light of this, but there’s hardly anybody in the middle. There are people who think it’s the flu and there are people who think it’s the zombie apocalypse. Yeah, hardly anybody in the middle.
Yvonne Baker: Yes.
Steve Garrity: Yeah, I think it’s heightened when we travel, also. We’ve been up to Massachusetts a couple times, and Colorado a couple times over the past eight months and it’s heightened. It seems like an obvious, so when you go to some other areas and you’re walking the beach and you see people wearing masks when no one’s around and you see people jogging and riding bicycles with masks on …
Steve Garrity: A policeman pulled my wife and I over in a small town, in Cape Cod, because we weren’t wearing a mask while we were riding our bicycles, so I think the … this is just a temporary thing. It’s going to get over. We’ll get over it. Not sure how long. No one knows. It might be 12 months, it might be 24 months, it might be longer. It’s hard to say, but it’s a temporary thing.
Steve Garrity: I do think there’s a thirst and a desire for people to interact and get together and communicate. I think once we get over a vaccine and having it safe for people to come back, they’ll certainly come back, but I don’t think until then.
Bill Moss: Can I ask a question, and maybe this would be for Nick as far as, I think everybody sees the benefit of having employees be able to come to an office. Could you see in the future, when renewals come up, are that 50,000 square foot tenant saying, “We see the benefit of a workplace that people can come to, but we don’t need a seat for everybody, so we’re going to lease 20,000 square feet. We’ll have room for people in the office, but we would expect that work from home thing to continue”?
Nick Poole: Yeah, I think it’s probable that it will happen in some form or fashion, for sure.
Nick Poole: A couple stats that I threw out here, prior to the pandemic, our research tells us that approximately 10% of professional and business services employees worked primarily from home.
Nick Poole: JLL’s research tells us that we expect white collar employees working primarily from home will more than double as a result of this pandemic. We anticipate that’ll be somewhere around 25% of white collar employees working from home, primarily from home.
Nick Poole: I could also tell you that, a couple other statistics that I jotted down, US occupancy, US office occupancy, office in particular dropped by 28.9 million square feet in the third quarter. That was even a bigger number than the previous record of 23.2 million square feet in Q2 of 2009, after the financial crisis.
Nick Poole: You’re right though, there’s tons of vacant space right now, where companies are saying, “Am I going to continue to pay for this space? Do I need to downsize this space? Should I consider sub-leasing it, or trying to terminate it?”
Nick Poole: As a result, sub-lease availability in the third quarter increased to 124 million square feet, across the United States. That’s exceeding any of the records that were established back in the dotcoms. That is happening, and it’s happening in a big way. I think that everybody is going to be forced to consider allowing a portion of their workforce to continue to work from home. We anticipate that, that’ll grow.
Nick Poole: The other thing that’s changing though, back to that densification comment that I made earlier is that, you can’t put the same level amount of people into the office, or most companies are projecting that they won’t, if given the option, because they don’t want to push that many people into a small space. They’re got to space them out. They’ve got to de-densify as a result of the square footage per employee is expected to grow, and floor plans are going to change.
Nick Poole: I think that they’ll start to counterbalance themselves a little bit. You’ve got some people working from home, you’ve got an increase is space per person. I anticipate there will be some type of counterbalance there, and I think that’s the path forward, at least for now.
Paul Jarley: Is this going to be a boon for space design consultants? Are they a thing?
Nick Poole: Yeah, they’re a thing. Yes. Yes and no. Yes and no. I think there will be a rollback of densification in our industry as a whole. That’s going to take 180, where companies are rethinking the way that they pack people into space, for sure.
Nick Poole: I still think that there will be some emphasis on open and collaboration spaces, or maybe private offices that some people will call huddle rooms, that you can use in a number of different flexible ways.
Nick Poole: But, I think your question was, is this going to be a boon for people to go in and redo spaces, or re-plan spaces.
Paul Jarley: Yeah.
Nick Poole: Yes and no. I think what’s going to happen, at least over the next year or two is that, all of this plethora of sublet spaces, or companies that have elected to terminate leases early, or just vacating space all together, they are going to provide some nice options in the market, where you’ve got furnished, wired, basically ready to go, what we call plug and play in the industry type solutions for companies.
Nick Poole: If a company doesn’t want to have to commit to a long five, seven, 10 year type of conventional office lease term, their own money to make the space different, they are going to have a big variety of options out there in the marketplace if they wanted to sublet, or take over somebody else’s space.
Nick Poole: We’re already seeing it. The activity that we do have is, on low capital type of moves or relocations in the space that’s more or less built out to a good standard, or something that they could use. Some of them already have the furniture in place.
Nick Poole: Companies are giving up space, others are coming in and taking over that space, as opposed to doing a brand new build-out on a long-term lease, because there’s just less flexibility and more cost involved.
Paul Jarley: That way, they can see how the world is really going to change over the next couple of years.
Nick Poole: Yeah.
Steve Garrity: Yeah, it’s probably safe to say companies are hesitant in spending too much money, or any money for that matter, of retrofitting their existing space. They are reacting and addressing their short-term needs, knowing that they can address their long-term needs once there’s some clarity with this COVID.
Steve Garrity: The good thing is, I believe, in the office world in Orlando, we had not been overbuilt before COVID. It was very disciplined, so consequently, the sub-lease space that Nick is referring to in my opinion, as it increases, it’s really not going to be dramatically impactful. There will be some options for customers and tenants to enjoy, no doubt, but I don’t think it’s really going to move the needle, assuming that companies are going to be reinventing themselves and creating additional companies that we haven’t even heard of just yet, because of the pandemic that we’re in.
Steve Garrity: Consequently, I think they’ll be leasing more space, de-densifying if you will. That open floor plan is critical, but I do think it’s promising and we will recover, like we recover from a lot of things. The question is, when will we start to meaningfully recover? That’s really unknown.
Steve Garrity: I think we’re just right now, people are reacting and adjusting to this transition period, which we’re in. But, the good news also is, it’s accelerating many other things, accelerating companies that are currently … we’ve already seen before COVID, but we’re seeing it even more so, companies that are in the high tax states, that really have now accelerated their decisions to really consider moving out of those states, moving into a state like Florida and other places that they can enjoy cost cutting efforts that they’ve always gravitated towards.
Paul Jarley: All right, so I’m going to ask you each a final question. I’m going to start with you, Yvonne. Is everybody going to be back in their office two years from now, or not? What do you think?
Yvonne Baker: We’re here now, and I think that many people will be back in. I think that we are absolutely moving to a more flexible work environment, going forward. I think we’re going to see great changes and they’re going to be exceptionally positive. I’m really excited about what the future holds.
Paul Jarley: Nick, what do you think?
Nick Poole: Our general consensus is that, office occupancy today is somewhere probably in that 20% to 30% range, depending on where you’re at. We see this growing to call it 40% to 50% by the third quarter of next year. End of the year, 2021, it’s probably in that 75% to 80% range, but the trend, depending on some type of vaccination schedule will certainly put people back into the office. I believe if it’s 12 months, 18 months, it will occur.
Nick Poole: I do think that this is temporary and I do think that we’ve worked the way that we’ve worked for years, and years, and years. We’ve got to get back to that at some level.
Paul Jarley: Thanks Nick. Steve?
Steve Garrity: No, I’d agree. I’d say we’re heading in that direction right now. Companies are coming back to the office, which is great. We’re seeing our buildings more and more full as the days go on. We’re an example of that, but now, we’re going to be … We’re currently alternating our occupancy, but we’re encouraging people if they would like, during the time that they’re supposed to be working from home, they want to come into the office, they’re certainly welcome to.
Steve Garrity: I think that trend is certainly happening, and I think it’s going to … Just the desire and the thirst to collaborate will be satisfied in ’21.
Paul Jarley: Bill, I’m going to give you the last word on this, my friend.
Bill Moss: Well, I would concur with what Yvonne and Nick and Steve have said. Yes, there will be more employees back in class A, or class B office space going forward. I think Yvonne set the bar pretty low, when she said there were four cars in the parking lot of a 200,000 square foot office building in South Park, so that being said, I think yes. I think there will be more employees. I do think, and Steve and Yvonne and Nick are closer than I am, but I think a lot of companies are going to spend a good deal of time, looking at how much space they actually need.
Paul Jarley: It’s my podcast, so I get to go last.
Paul Jarley: The death of the office has been greatly exaggerated. Few of us have homes that are set up for work and school for the entire family. Besides, that much togetherness just isn’t a good thing. We’re social creatures, who crave authentic, serendipitous interaction and collaboration with a broad range of people.
Paul Jarley: Much of that interaction occurs at work. If you don’t buy that, buy this. People working from home will not get promoted at the same rate as people who are working in the office. Out of sight, out of mind.
Paul Jarley: For these reasons, people will undoubtedly be back in their offices in less than two years. My guess is, in less than one year. What the office looks like and how frequently they use it, well, that might be a different story. With personal space being at a premium, I don’t see hoteling or big open floor plans being the trend of the day.
Paul Jarley: People are going to want their own office, even if they’re not in it every day. They are going to want that office to provide them protection from viruses and other threats. They’re still going to be able to want to Zoom or work from home on occasion, to get stuff done.
Paul Jarley: Greater variety in office space is likely to be the new trend, not working from home. What do you think?
Paul Jarley: Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show.
Paul Jarley: Special thanks to my producer, Josh Miranda and the whole team at the Office of Outreach and Engagement, here at the UCF College of Business, and thank you, for listening.
Paul Jarley: Until next time, charge on.