In September, President Joe Biden issued a federal edict for large employers (100 employees or more) to require vaccines against COVID-19, or requiring weekly COVID-19 testing. The latest reporting out of Washington, D.C., is that the mandate carried out by the Occupational Safety and Health Administration (OSHA) will be enforced with hefty fines for noncompliance.
Several blue-chip companies such as Anthem, Delta Air Lines, Google, Microsoft, Salesforce, Twitter, Tyson Foods, ViacomCBS, The Walt Disney Co. and Walmart have already announced plans to get their workforce fully or close to fully vaccinated.
Clinton McKellar, executive director of Cushman & Wakefield’s Atlanta office, says that in addition to protecting their employees’ health, a large-scale vaccine mandate could potentially facilitate a return to pre-pandemic norms for corporate America, thus more employees in the office.
“Giving vaccinated employees the opportunity to safely return to the office allows for impromptu meetings and collaboration that is difficult to replicate in a remote environment,” says McKellar. “In Atlanta, what is proven out is that people, if given the choice, would rather work from home than come to the office and wear a mask.”
Clients are telling brokers that their workers who are regularly in their office are few and literally far between, and they’re missing out on the camaraderie and in-person interactions that boost both productivity and morale.
Chris Schaaf, managing director of JLL’s Charlotte office, says that companies are encouraging their employees to get vaccinated and come back to the office in creative ways, including bonuses and lottery drawings.
“We’ve seen more companies take a positive approach to either empowering those who have been vaccinated or creating systems around those who aren’t to make sure that they feel comfortable talking about maybe why they could,” says Schaaf.
Office utilization wanes
Kastle Systems, a security and access firm based in Falls Church, Va., generates weekly progress reports for office usage rates among its network of buildings that use Kastle’s access control attempts. The Kastle Back to Work Barometer comprises data from 10 major markets: Austin, Chicago, Dallas, Houston, Los Angeles, New York City, Philadelphia, San Francisco, San Jose and Washington, D.C. As of Sept. 27, the office utilization rate hovered around 34.4 percent for the 10-city average, which is nearly 30 basis points higher than the beginning of September.
Office utilization rates are so low because of the endurance and massive scale of the work from home (WFH) movement in response to the COVID-19 outbreak. Recently Big Four accounting firm PwC granted its U.S. network of 40,000 service employees to work remotely on a permanent basis, which to date is the largest such announcement from a premier employer and could represent a cultural shift away from the traditional office setting.
Employers such as PwC have been productive enough to bypass the traditional 9-to-5 office culture in the name of safety, which has been jeopardized in recent months with the rise of the Delta variant. In the past 28 days as of this writing, there were more than 3.9 million positive cases of COVID-19, according to research from Johns Hopkins University & Medicine. The Centers of Disease Control and Prevention (CDC) stated in late September that the Delta variant, which was first identified in the United States in March, now accounts for 99 percent of all COVID-19 cases.
Todd McManus, vice president of advisory services at Edge Commercial Real Estate, says that Northern Virginia’s office market has a higher utilization compared to Kastle Systems’ 10-city average because the region has a higher vaccination rate among its populace. He says that as a manager he does prefer to see “the whites of his employees’ eyes” but acknowledges the paradigm shift occurring.
“It’s part of the fabric of our country right now; I don’t know that anybody will go back five days a week,” says McManus. “There will be some segment of the workforce that experiences some type of work from home, whether that be one to three days a week, but the office market as we know it has definitely changed.”
Doug Ryan, executive vice president and partner of Colliers International’s Nashville office, concurs and says that some form of flexible schedule is “here to stay.”
“For the vast majority of companies, five days a week in the office is probably not going to be their new normal,” says Ryan. “Folks figured out how to work remotely. And with the exception of those firms that need somebody to be sitting behind the desk, they’re all adopting flexible work schedules.”
Nashville’s utilization likely falls into the 30 to 40 percent range, which is down from this summer when the Delta variant drove COVID-19 cases up, according to Ryan. Frank Thomasson, first vice president of CBRE’s Nashville office, says that flexible workspaces and scheduling is a good thing for the office sector’s long-term viability, and that the WFH approach has proven successful.
“Many companies are restructuring how their employees will work, creating greater flexibility in how or where people work every day,” says Thomasson. “While in the short-term tenant footprints may decrease, the long-term benefit of a higher-quality environment with employees’ personal wellbeing as a priority will sustain this sector.”
Miami appears to be the market with the most employees in their office environments on a day-to-day basis. Ryan Holtzman, managing director of Cushman & Wakefield’s Miami office, says that the city has had about half of its workforce back in the office for both major waves of COVID-19.
“Before Delta variant, we got up to almost 50 percent occupancy in some of our buildings,” says Holtzman. “I’d say we’re at 50 percent right now and gaining traction.”
Michael Howell, senior vice president of Lincoln Property Co. (LPC) Southeast’s office division in Atlanta, says that the office sector may shift permanently toward more flexible or hybrid work schedules but that the office environment will remain intact if companies wish to preserve their culture and productivity.
“I don’t believe that a complete WFH approach is a viable, long-term solution to running a company successfully,” says Howell.
“The majority of tenants we speak to are not planning to work from home permanently and still believe that culture and face-to-face interactions are critical to long-term success and talent retention,” adds Hunter Henritze, senior vice president of LPC Southeast’s office division in Atlanta.
Schaaf expects the Charlotte office market, as well as the U.S. office sector overall, to eventually reach a tipping point where workers return to the office permanently and in droves.
“The good news is that it’s not a matter of if but when people come back to the office,” says Schaaf. “Because it will happen. We’ll start to see that momentum kick up pretty quickly.”
Active sublease market
Employers and their landlords are navigating what to do with so much unused office space, and many companies are opting to put their excess space on the sublease market.
By way of example, metro Atlanta’s sublease space was at an all-time high of 5.5 million square feet in the first quarter of this year, according to data from CoStar Group. McKellar says that the metro’s sublease inventory is back down to 5 million square feet and accounts for 10 percent of all the vacant space in Atlanta’s office market.
“Companies have realized that this spigot is turned off on new sublease inventory,” says McKellar. “The good subleases are getting snapped up, and people are willing to pay a premium to get them.”
Carvana is reportedly taking a large chunk of Atlanta’s sublease inventory off the market by subleasing 600,000 square feet from State Farm at its Dunwoody, Ga., campus.
In Atlanta, Deluxe Corp. leased 171,269 square feet of sublease space and ServiceMaster leased 53,440 square feet. But the big swing happened when Carvana reportedly leased 600,000 space from State Farm at the insurer’s regional headquarters in the Central Perimeter submarket. These moves are helping bring the city’s volume of subleased inventory back down. Howell of LPC Southeast says that subleased space is also being taken off the market organically by the original tenant.
“We have seen several companies actually pull their sublease from the market as a result of returning to the office, and we believe more companies will do the same,” says Howell.
Sublease space is an attractive category because it’s more often than not turnkey and allows an alternative option for companies to wait and see how other companies utilize their spaces long-term.
McManus says that in just looking at the Tysons Corner submarket of Northern Virginia, there are currently 59 sublease spaces on the market exceeding 5,000 square feet.
“Some firms in that 5,000- to 10,000-square-foot range threw up their hands when we got hit with the Delta variant,” says McManus. “Of the 59 available spaces, a third of those have come on the market in the past three to six months.”
Ryan of Colliers says that Nashville’s subleased inventory is not at “alarming levels” yet and gives options for companies looking to enter the Nashville market strategically.
“Companies that are looking to get into the market quickly are looking at subleased space,” says Ryan. “Folks who are looking for safety today can get in Nashville quicker by looking at the sublease space.”
Miami’s subleased space totals roughly 464,000 square feet, which accounts for less than 5 percent of all available office space in Miami-Dade County, according to data from Avison Young.
“All the sublease spaces in Miami are full for stop gaps for future developments or future buildouts,” says Holtzman. “Miami doesn’t have a building that has a 500,000-square-foot tenant that all of a sudden is putting up their entire space or half their space for sublease. It’s been a blessing in disguise.”
Flight to quality
Even with the headwinds of less office utilization and the Delta variant, companies don’t appear to have much uncertainty about the future of the office market. In the past handful of months, major announcements have included Oracle planning a marquee office campus in Nashville; Amazon inching closer to the opening of its $5 billion HQ2 campus in Northern Virginia; Microsoft and Spotify leasing large swaths of space in Miami; Corning and Credit Karma expanding in Charlotte; and Visa, FanDuel, Twitter and Airbnb taking down spaces across Atlanta.
CBRE’s Thomasson says that the common trait of most all major office relocations and expansions to the Southeast’s top markets is a flight to quality office space.
“Older buildings are being renovated and heavily amenitized, and new construction projects are infusing the marketplace with quality space that is geared to elevating the user experience,” says Thomasson, who is on the leasing team for GBT Realty’s ONE22ONE office tower underway in Nashville.
“Best-in-class amenities along with an environment designed to promote health and wellness among its occupants are top priorities to those seeking office space,” he adds.
Holtzman of Cushman & Wakefield says that firms are willing to “pay the freight” to lease space across Miami’s core submarkets. Holtzman arranged Microsoft’s 50,000-square-foot lease at 830 Brickell and recently wrapped another deal at the tower that will be the new high watermark for Miami’s office market as it closed at more than $80 per square foot in rent.
“It’s still less expensive than some of the larger markets like San Francisco, certain areas of Chicago and specifically New York,” says Holtzman. “So as long as the buildings are fully amenitized and they have a clean slate with a fresh look, companies are willing to pay up to be in the premier buildings.”
Schaaf says there’s a similar dynamic at play in Charlotte from both existing companies growing organically in the city and inbound companies as both are funneling toward newer buildings near amenities and lifestyle attractions. He says it mostly due to talent retention and recruitment.
Nashville’s office market is also faring well with rental rates on the rise. Thomasson expects the market to experience positive absorption for the year, and Ryan with Colliers says that Nashville is retaining north of 70 percent of all Middle Tennessee college students post-graduation.
“We are retaining more of our college graduates than we ever have before,” says Ryan. “There are over 40,000 jobs in the pipeline coming to Nashville in the next 10 years that are not here today. That is certainly the largest we’ve ever seen.”
McKellar of Cushman & Wakefield says Atlanta also seems to be peaking in terms of interest in available office space as the city is also a discount compared to gateway markets.
“We continue to see large corporations planning a regional flag in Atlanta, so while the average office space maybe a little bit smaller, activity seems to be at an all-time high,” says McKellar. “We are going to see rightsizing of offices happening over the next five years, and companies are getting more efficient with how they manage desk use on a daily basis. Markets like Atlanta are going to be winners as the workforce across the country becomes more distributed.”
— John Nelson
This article originally appeared in the September 2021 issue of Southeast Real Estate Business.