At the end of 2019, a mere 14 months back—and also infinitely long ago—office vacancy rates in many cities were at historic lows. In London, companies like Google and Amazon had leased up more than a million square feet of space each and WeWork had grown to be the second largest office tenant in the capital of capitals with 2.6 million square feet of office space – more than any company or organization other than the UK government.
In the U.S., Amazon had just selected Arlington, Virgina for a second headquarters that will eventually occupy as much as 4 million square feet of space. In the fall of 2020, Google unveiled plans for a new campus in downtown San Jose that will offer more than 7 million square feet of office space.
Then, just a few months later, everyone left the office and started working from home. Some companies, like Twitter, went as far as to say that their staff could work remotely forever.
To be sure, remote working has been one of the most immediate and visible effects of the COVID-19 pandemic on our cities. Transit systems designed to move thousands of workers in and out of city centers are empty. Bustling commercial districts like Midtown Manhattan have been silent for months. And vast offices sit empty.
Companies have been trying to sublease space or choosing not to renew leases as they expire, which is now causing office vacancy rates to rise in many cities. For example, downtown Toronto’s vacancy rate rose from 4.7% in the third quarter of 2020 to 7.2% in the fourth quarter, according to data collected by CBRE. By comparison, vacancies in the city core of London had risen to 9.3% while vacancies in Manhattan stood at 15.1%, up 4% from 2019 and the highest since 1999, according to Savills.
But with multiple vaccines approved and now being deployed, commercial landlords and brokers are cautiously optimistic that we’ll return to the office in significant numbers by the end of 2021. But what will we be returning to? Will workers embrace the open-floor office plan packed with double-sided bench desks popularized by tech companies desperate to squeeze as many employees into as little space as possible? Are we willing to commute hours on end to city centers to perform tasks we’ve demonstrated we can do just as effectively from home? Time will tell, but after such a prolonged departure, it seems likely that where, when and how we work are about to change.
RETHINKING & REORGANIZING OUR WORKSPACES
Of course, not everyone works in an office and has been able to work from home. In fact, the majority of work can’t be performed at home. In the U.S., only 37% of non-farm employment is in classes of occupations that could be considered “office jobs”—professional services, financial services, government—while the majority of employment, whether it be in manufacturing, construction, hospitality or education, is typically tied to a location other than an office. Even in a city like New York, only 50% of employment, prior to the pandemic, was in categories that could be described as office jobs.
So when and how often employees return to the office won’t cause wholesale changes to our cities. But their choices, and those of the companies that employ them, will have an outsized impact on the form and function of our downtowns and the transportation systems that serve them.
Most of the discussion around the future of the office to date has been focused on where we will work after the pandemic. Recent research by Gensler indicates that the majority of office workers in the U.S. and Europe want to return to the office, but not necessarily five days a week. According to Gensler’s Janet Pogue, a principal and the global workplace research leader at the firm, 52% of U.S. office workers want to move towards a hybrid model with a portion of their week spent at the office and a portion spent at home. In Europe, two-thirds of office workers want to return to a hybrid model.
“The longer you commute to work, the more likely you want to work in a hybrid model,” says Pogue. “The hybrid work model is likely here to stay.”
The next question then is what will that work environment look like. “We’re not coming back to the office to sit shoulder to shoulder in an open space to do focused work,” says Pogue. Instead, she sees an office with more private spaces for collaboration with colleagues both virtually and in-person.
Tom Lloyd, co-founder of Pearson Lloyd, a London-based design studio whose practice ranges from the design of offices and their furnishings to the outfitting of first-class jet compartments, believes companies will likely require the same volume of space, but design and organize it differently.
“Over time, as organizations and planners begin to understand the benefits of people working from home for one, two or three days a week, you’ll start to see people modifying their real estate portfolios,” he says. “We’ll probably end up needing the same amount of footprint but the way it’s developed and implemented for each organization is very different.”
Tony Astles, a managing partner and the head of Canadian real estate services for BentallGreenOak agrees. “Generally we are going to need the same amount of space as we had before,” he says. With multi-year lease terms mitigating the pace of change in space utilization, he believes the pandemic will have less of a long-term effect on demand for office space and more of an impact on how we use and design the spaces themselves. “The first question to ask is what does each person do?” he says. “Do they need focused quiet work space or is their work inventive and creative? In the past we’ve tried to put them both in the same space, which doesn’t make sense.”
He says that the long-running trend towards open-space work environments was already beginning to reverse itself prior to the pandemic; more and more research demonstrated that while open plans create cost savings, they don’t necessarily lead to better communication and collaboration. And after a year or more of social distancing and remote working, “design is going to consider the effects of proximity much more conscientiously going forward.”
According to Gensler’s research, while the majority of office employees want to work in a hybrid model, almost everyone wants a dedicated desk to work at—90% of U.S. office workers say they want an assigned desk. In fact, 61% say they would rather give up the flexibility to work remotely than give up an assigned desk to work at when they are at the office. While attitudes towards having a dedicated desk—and safe surrounding perimeter—may soften as social distancing measures are relaxed, this could have profound implications on the future of commercial real estate. If the future office provides dedicated desks to employees regardless of how many days they are actually in the office—and more private spaces for virtual and in-person collaboration—companies will likely find that these requirements offset any savings created by those employees who work remotely full-time. They may find that they need even more space than they had prior to the pandemic even though they have fewer employees in the office at any one time.
This rethinking and reorganization of the office will require companies to think of the office less as a workplace and more as a destination if they want to attract and retain the best employees. James Andrade, SVP of Learning and Innovation for CapitaLand, a Singapore-based multinational, says his firm has invested in the creation of a ‘shared executive learning center’ for tenants within their developments and for the public at large to develop soft skills. “We’re trying to turn the office into a place that offers community and where you build skills so it becomes a destination you go to, not just a place where you work.”
THE RECKONING FOR DOWNTOWN RETAIL & RESTAURANTS
Yet the most significant impact of a shift to a hybrid office-home work model and hybrid open-private office designs won’t be on the amount of office space leased in downtown and central business district office towers, but on the ground-level shops, restaurants and businesses for whom office workers are the primary customers. If office workers, on average, work from home 1.5 days per week, that’s 30% fewer people per week going out to eat or shop, even if economic activity and employment were to recover to its pre-pandemic heights. It could also mean 30% fewer cars, as well as fewer trips in and out of the city center on public transit. These will likely be some of the longest lasting and most significant impacts the pandemic has on our cities, for better and worse.
On the positive side, we could see less traffic and congestion—especially if people not only work from home more, but work more flexible hours, thereby reducing rush hour traffic. Of course, this will affect the budgets of transit authorities in the short term, but it may also negate the needs for billions of dollars in new roads and transit infrastructure in some cities.
On the downside, the impact is clear and catastrophic for restaurants and retailers. Those businesses that were affected by the pandemic first are also likely to be affected by it the longest. “It’s very tough to see them all coming out of the back end of this. They just won’t be there,” says Astles. “There will be empty spaces in a lot of places.”
This will require a long-term reevaluation of ground-level commercial space by building owners and a reinvention of policy on the part of municipal governments when it comes to transportation and the zoning and design of our downtowns.
Reduced rents for ground floor commercial spaces will eventually attract some new restaurateurs and shops, but without new sources of footfall, whether from residents or visitors, many downtowns risk a future blighted by boarded up storefronts and urban decay. With fewer office workers to drive economic activity, cities should look to create zoning and incentives to increase the residential population in their city centers, an idea that has even been floated for Midtown Manhattan. As we’ve seen during the pandemic, city centers with larger residential populations have proven to be more resilient economically than those occupied mostly by office buildings.
And while tourism has ground to a virtual standstill in most cities, the visitor economy will play an important role in making up for the loss of office worker expenditures. While U.S. travelers say they are less excited about visiting cities now than they were prior to the pandemic, cities are still the most popular type of destination they plan to visit in the next 12 months, according to a survey conducted by Destination Analysts in January 2021. And visitors need not only come from afar – if people are working from home more, downtowns can become destinations for a regional audience if it offers more entertainment, leisure and cultural activities.
While no crisis in modern times compares to the global impact COVID-19 has had on our cities, there are city-specific examples we can look to. In the wake of 9/11, few people wanted to work, let alone live, in Lower Manhattan. In the recession that followed, companies looked to offload space: office space available for sublease climbed to a record 17.5 million square feet in Manhattan. The pandemic has had a similar effect, with 16 million square feet of space available for sublease by the fall of 2020.
But demand for office space not only recovered, it grew. And with a combination of policy changes, incentives and private sector investments, Lower Manhattan doubled its residential population in the decade after 9/11: by 2019 there were more than three times as many people living in Lower Manhattan as there were in 2001. Just as with 9/11, the pandemic won’t turn out to be the end of offices or cities. Indeed, both Facebook and Google made high-profile investments in New York offices in 2020. Rather, we’ll more likely look back a decade from now, as with Lower Manhattan, and see it as the start of a new beginning.