THE HURDLES IN OUR PATH In
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By John Salustri • BOMA InternationalEmployee-Centric Office
1
2
THE CURRENT CLIMATE
3 IDEALS AND REALITY: AN OVERVIEW
A GREATER PARTNERSHIP
Finally leaving the pandemic in the rearview mirror, corporate occupiers now must battle hostile economic conditions and supply chain challenges. But they get by with a little help . . . from their property managers and owners.
IDEA AN OVERVIEW
“By improving the start-to-finish experience of being at work from the flexibility and comfort of the spaces where team members spend their time, down to the very materials that make up a building office design can set companies apart in this bold new era of prioritizing the human experience.”
So say Gensler co-CEOs Diane Hoskins and Andy Cohen in “A Well-Designed Workspace Is a Competitive Advantage” They go on to say that the work environment, more than just a place to be productive, can serve as the “physical representation of a company’s ethos and identity.” Wow. A far cry indeed from the hierarchically laden days of cubicles, bullpens, and walnut-lined corner offices
Of course, the move to fully articulated office environments has been on the rise since well before the pandemic. These are the spaces that embrace health and safety and the three Cs of camaraderie, cooperation, and communication. All the while, they advance the cause of both the corporate mission and the asset’s social relationship to the outside community (a fourth “C”?)
The pandemic, of course, only served to accelerate the lofty mission characterized by Cohen and Hoskins, even if the immediate post-pandemic purpose was to lure workers back to the office “There was a period early on when a lot of players were afraid they would lose employees,” says one contributor. And while that fear has moderated “a bit, they do see a lot of value in the collaboration that’s lost in hybrid protocols, and they’re trying to achieve that in their offices.”
IDEA AN OVERVIEW (cont.)
Nevertheless, the hybrid model is now entrenched, most clearly acted out, data tell us, on Mondays and Fridays–the days most popular for skipping the commute. As one BOMA member adds: “It’s interesting to note that, for the first time ever, there are now on average fewer seats in the office than there are employees due to space reductions and space sharing.” And it works, especially for the employee who is given that option, as well as for corporate decision makers looking to control real estate costs. (Quoting IWG data, HRO Today reports a 25% reduction in office space and a 33% savings in in-office amenities as a result.)
It does not work, of course, for those employers demanding butts in the chairs they paid for But, while certain organizations have famously mandated a full-time office presence (the City of New York and Google among them), the leaders of those organizations do so at their own risk: “In our experience,” says Gallup, “job openings may receive as many as two to three times more applicants for certain jobs that allow hybrid or remote options”
The research firm late in 2023 delivered the numbers: While just prior to the pandemic, 50% of “remote-capable” workers worked fully on site, that number has shriveled by more than half–to 20%. In short, by last year, “approximately 40% of remote-capable employees shifted from working entirely on site to either a hybrid or exclusively remote work arrangement.”
Fold into the allure of hybrid work the challenges employers face in the current economic environment. Marked as it is by recordhigh interest rates, out-of-line construction costs and lingering supply-chain hurdles, the economy only toughens an already tough task–how to create a fully realized, employee-centric work environment.
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THE CURRENT CLIMATE
Yes, hybrid work models are now de rigeuer in offices worldwide, one in a mix of trends that led to a staggering national vacancy rate of 179% in February (an increase of 140 basis points over last year if you did not feel bad enough already) Further, CBRE predicts that number peaking at 19.8% by year end. (For more on the state of the office, visit BOMA’s recent Deep Dive on receiverships.)
Included in that cocktail of woes is an interest rate that has remained stubbornly high since the summer of last year, 525% to 5.5% by some counts. And, as we all painfully know by now, when interest rates rise, expenses follow. Citing Currie and Brown statistics, GlobeSt.com reports that construction costs could rise by as much as six percent this year, on top of the four percent we sustained in 2023
Finally, while improvements are being made in the resilience of the global supply chain, issues remain. These include cyberattacks, ongoing geopolitical threats and homegrown labor and political stress.
On one hand, “The worst of supply chain stress is probably behind us,” writes Cushman & Wakefield. “But geographical tensions and economic uncertainty will continue to impact supply chains, potentially resulting in increased costs and extended project timelines in 2024.” Building costs are now 33% above 2019 levels, the firm reports
The problems are exacerbated for owners of certain assets. “The properties that are really hurting are the buildings classed below a B,” says one source. “Companies want to recruit the best talent. But the best talent wants to be in the coolest buildings.” That means those assets that offer “amenities most likely to gain a tenant base” Located in up-and-coming 24/7 communities does not hurt either.
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THE CURRENT CLIMATE (cont.)
“I don’t know of a single user who would want to use B minus and C space,” says another contributor flatly. One asset he uses as a for-instance suffers from tiny offices, a disproportionate number of meeting rooms and finishes that are “just okay” One option is to demolish the space and “open the floor so you can better sense its possibilities. But are you going to roll the dice and pay that $50 or $60 a foot if you only have a 10% or 15% chance to re-lease it?”
Gensler’s leaders agree: “Occupancy rates of lower-quality office stock are suffering, as companies seek to occupy only the best, most advanced spaces.”
Now, to put all of this into context, it does seem that inflation is slowing, even if the price decreases of deflation are not yet a factor Further, the Fed is holding its water on further interest rate hikes, for now. Plus, with a healthy addition of 303,000 jobs in March, we are starting to see positive indicators and a ray of economic hope for next year.
But that is next year, and, as we have already seen, against the current still-uncertain environment, corporate occupiers “are leveraging hybrid protocols to manage their overall real estate expense,” says one contributor. They might hire 100 people, “but they’re not going to grow their current 20-desk space by an equivalent amount.”
Nevertheless, he adds, “They want their space to be a facilitator of engagement.” Which, of course, is a testament to the value that remains in having an office presence, something BOMA members are well aware of. But that is a hard nut to crack given current conditions.
THE CURRENT CLIMATE (cont.)
“Companies have had a huge challenge trying to make their workspaces inviting to the employees due to rising costs,” says the source, a challenge shared, of course, by the property owners and managers intent on marketing their spaces. The challenge is exacerbated by “the huge menu of responsibilities a typical property manager is faced with on a day-to-day basis.” There are not enough hours in a day, he says, to accomplish the daily workload while developing “new initiatives to make their building a more exciting place in which to work.”
But the source noted that heavy workloads do not exempt managers from fulfilling that duty to current or prospective tenants And that begs a further question: As Logan Gradison, director of Workplace Strategy for Transwestern Real Estate Services, wrote for BOMA recently, “What’s the role of building owners and managers in all of this? How can you improve the office experience and increase its value? After all, you’ve already upgraded fitness centers, built state-of-the-art conference centers, constructed rooftop decks, and updated restrooms throughout your properties ”
A GREATER PARTNERSHIP
For Gradison, a keyword in the growing link between property professionals and their tenants is seamlessness “Simply put, the in-office experience must be seamless,” he writes. “This manifests itself in countless areas, from the responsiveness of building management to the cleanliness and upkeep of restrooms [and] the ease of use of shared amenities.”
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No one thinks about a restroom that is well-kept or elevators that perform as they should. It is when a system goes sideways that emails start. And that is part and parcel of the daily routine mentioned above.
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A GREATER PARTNERSHIP (cont.)
"But the linkage today transcends all of that, and it demands much more. Owners and managers “have now become participants in the tenant experience at the building, adding physical spaces and services that both complement and improve a day at the office,” CBRE vice president Brett Shannon told the Urban Land Institute (ULI) recently. “Renovations of shared amenities allow tenants to derive greater value from the space.”
Our contributors agree: “In a down market like this, tenant engagement has become an important piece of what we do as property managers,” says one. Creating a vibrant, active space filled with a calendar of events was a lot of work, he says. But “we’ve had great success. Tenants really enjoy the various activities It’s very rewarding to achieve a closer connection to the tenants” (More on that shortly)
But the connection extends beyond activities. It extends even beyond well-cared-for restrooms. In a sense, the office building of today has to be user-ready, fitted out with the spaces that benefit large and small tenants alike The fitness rooms and conference centers Gradison referenced are just the start “You have to deliver best-in-class amenities and service, especially in a down market like this,” says one source. “Prospective tenants will see it on their tours. And the brokers already know. If they see it in one building and not in yours, you can easily be eliminated from their short list”
To one extent or the other, the ideal office is today’s reality. “Most of the spaces that are built now cater to the three C’s,” says one contributor, citing everything from huddle rooms and planned collaborative seating to “large break areas to encourage impromptu breakout sessions Every space, even spec space, has at least a little of that built into it” Much of this is also taking place in common areas provided by the owner and manager, he adds, a provision that equalizes the playing field between large and small takers.
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A GREATER PARTNERSHIP (cont.)
On the part of both, “expectations are higher,” says one source. Which means the building has to deliver, whether the expectation is for “more power or inspiring and fun environments It’s all amped up”
But how amped up can it get under the cloud of the economy? “Higher costs have hurt operating expenses,” says one BOMA member. “With insurance and property taxes skyrocketing as well as labor costs, property managers have a tight rope to navigate, especially when trying to implement new amenities”
The solution is limited only by imagination. “Knowing there has to be a reason for an employee to shed their pajamas and return to the office, the property manager can help build a more dynamic work environment with a variety of no- and low-cost initiatives,” says one source “Offering events such as community service projects, educational offerings and music are ways to enhance the work environment.”
The cost of an assistant to coordinate such activities might be offset by the time managers gain to “focus on more important, client-facing issues with their tenants”
And what might some of those events look like? Details, please:
“On Valentine’s Day, we hosted a ‘build your own bouquet’ with fresh roses and other flowers in the main lobby,” says the source who realized “great success” with such events He describes this offering as a “massive hit. We arranged over 300 bouquets with over 3,600 flowers.”
Want more? “We held a treasure hunt on St. Patrick’s Day, giving clues to find hidden medallions that involved various locations throughout the building, and we awarded a prize to the winner”
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A GREATER PARTNERSHIP (cont.)
In addition, “We hosted a basketball viewing party for March Madness in the amenity space, with games on the big screen, game-related snacks and a building-wide bracket challenge that awarded prizes to top winners”
Returning to the basics, amped up does not necessarily mean new. In budgetarily restrictive times, “People can be very creative in using stuff they already have,” says one BOMA member “Remember, there’s a lot of surplus furniture around”
Are you at a loss for how to create attractive spaces with limited budgets? There are resources at your fingertips, specifically, the “incredible network that comes with being a BOMA member,” says one contributor. Now is the time, he says, to lean on neighbors, colleagues, and competitors in that network
However it gets done, done it has to get. As CBRE states: “To increase office attendance, companies will need to offer employees top-notch amenities both in and around the workplace, boosting demand in the most desirable and accessible submarkets”
At the end of the day, the fully articulated office is an opportunity, not just for the building owner and manager, but for the tenants as well. Not only is it a magnet for talent, but it also represents a value proposition measured in productivity, communication, and teamwork
The fate of B and C properties, whether it includes demolition or massive gut renovation to higher and better uses, remains to be seen. But in an era of flights to quality, well located assets strategically positioned will, in the words of one contributor, get employees now “sitting home in their PJs to get out, join the office team and work smarter, better and more productively”
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ACKNOWLEDGEMENTS:
Generously sharing their time and expertise were:
Randal Froebelius, P.Eng. BOMA Fellow, Immediate Past Chair and CEO, BOMA International; President and General Manager, Equity ICI Real Estate Services Inc., Toronto, ON.
Becky Hanner, CPM, RPA, BOMA Fellow, Principal, Commercial Asset Services, Raleigh, NC.
Seth Redfield, CPM, RPA, Senior Property Manager, Piedmont Office Realty Trust, Minneapolis.
RESEARCH WORK CONTRIBUTING TO THIS PAPER:
From BOMA International: “How BOMA Members Can Help ReIgnite Office Attendance,” by Logan Gradison, Apr 9, 2024 https://www.boma.org/BOMAKnowledgeCenter/Topics/OfficeSector/How%20BOMA%20Members%20Can%20Help%20ReIgnite%20Office%20Attendance.aspx
From Bloomberg: “Analysis: Supply Chains in 2024–Improved, But Still Vulnerable,” by Denis Demblowski, Nov 5, 2023 https://news.bloomberglaw.com/bloomberg-lawanalysis/analysis-supply-chains-in-2024-improved-but-stillvulnerable
From CBRE: “US Real Estate Market Outlook 2024,” Dec 12, 2023 https://wwwcbrecom/insights/books/us-real-estate-marketoutlook-2024
From CNBC: “Here’s When the Federal Reserve Could Cut Interest Rates,” by Kelsey Neubauer and Dan Avery, Mar. 21, 2024. https://wwwcnbccom/select/when-will-interest-rates-drop/? &qsearchterm=interst%20rates
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ACNOWLEDGEMENTS (cont.)
From CNN Business: “March Jobs Report Comes in Hot: The US Economy Added 303,000 Positions Last Month,” by Alicia Wallace, Apr. 5, 2024.
https://www.cnn.com/2024/04/05/economy/us-jobs-reportmarch-final/index.html
From CommercialEdge: National Office Report: “US Office Market Continues to Navigate Demand Shifts,” by Evelyn Jozsa, Mar. 22, 2024.
https://www.commercialedge.com/blog/national-office-report/
From Cushman & Wakefield: “Americas Office Fitout Cost Guide 2024” https://www.cushmanwakefield.com/en/insights/office-fit-outcost-guide?
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From Gallup: “The Future of the Office Has Arrived: It's Hybrid,” by Ben Wigert, Jim Harter and Sangeeta Agrawal, Oct. 29, 2023. https://www.gallup.com/workplace/511994/future-office-arrivedhybrid.aspx
From Gensler: “A Well-Designed Workplace Is a Competitive Advantage,” by Diane Hoskins and Andy Cohen, Apr 2, 2024 https://www.gensler.com/blog/well-designed-workplace-is-acompetitive-advantage?utm source=dialogue-nowemail 2024 apr04&utm medium=email&utm campaign=dialog ue-now&utm content=master-list
From GlobeStcom: “Construction Costs Expected to Increase as much as 6% This Year,” by Kathy Rembisz, Feb. 21, 2024. https://www.globest.com/2024/02/21/construction-costsexpected-to-increase-as-much-as-6-this-year/? slreturn=20240315142810
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From HRO Today: “Hybrid Work Results in Cost Savings and Increased Employee Happiness”
https://wwwhrotodaycom/news/hybrid-work-results-in-costsavings-and-increased-employee-happiness/
From the Urban Land Institute: “Manhattan Office Market
Returning with More Vibrant Look and Feel on Lower Levels,” by Patricia Kirk, Apr 5, 2024
https://urbanlanduliorg/issues-trends/manhattan-officemarket-returning-with-more-vibrant-look-and-feel-on-lowerlevels?
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