Coronavirus Triggers ‘Fundamental Rethinking’ of Office Market
DBRS Morningstar, Chicago, said the COVID-19 pandemic could spark a “fundamental rethinking” of the open office concept and accelerate the move toward more flexible working arrangements.
These changes could lead to increasing office vacancy nationwide, DBRS Morningstar said.
“Over the next two to three years, companies that traditionally reduced office space needs by decreasing the average square footage per employee, eliminating offices and/or reducing the size of or eliminating cubicles altogether may look to enhance social distancing in office environments,” the report said. “In addition, for companies that determine that remote working arrangements have little to no effect on productivity over a traditional office environment, such arrangements may allow them to distance their employees without the need for increased space and allow for the recruiting of talent from a larger geographic base.”
Office work was changing before the pandemic as companies reduced space consumed. “There is anecdotal evidence that companies have been reconsidering the open office concept and the need to increase separation between employees may add momentum to this idea,” the report said. “With more developed collaboration and video conferencing tools available, the trend may evolve further into viewing the office as a place for people to converge and collaborate rather than a place to do individual work.”
Movement toward a work-from-home corporate culture might have a smaller effect on the office market in the short term because many tenants are locked into relatively long-term leases. But while many office properties may feel secure with long leases, there is still a risk that tenants could stop paying rent because of falling revenue or not re-sign a lease set to expire during the pandemic, the report said.
In the longer run, several scenarios could play out if offices begin to adopt socially distant layouts, DBRS Morningstar said. One possibility: tenants might re-evaluate their office space needs when their lease expires and could potentially not re-sign their lease or negotiate a downsize in their new lease. Another possibility is that employers might expect all employees to work in the office and will lease more space in order to accommodate social distancing guidelines. “We believe this is less likely to occur because it would increase costs significantly and signing long-term leases for additional space may not be prudent during the recession or a potentially drawn-out recovery,” the report said.
