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As Uncertainty Continues in Office Market, What Should Tenants Do?

Crafty, a company that assists workplaces in managing food, beverages and supplies, recently signed a 12,000-square-foot office lease at 205 W. Wacker in Chicago. The company is expanding its footprint, having previously occupied 3,500 square feet in the West Loop neighborhood.

By Ryan Foran, Cresa

As we approach the three-year anniversary of the start of the pandemic, it continues to affect the commercial real estate industry in many ways, with no asset class impacted as significantly as the office sector. While retail initially stumbled but rebounded, and industrial soared to unexpected heights amid distribution emergencies, millions of U.S. office employees continue a tenuous balance of working from home versus going into the office. 

The pandemic wasn’t all bad news for office tenants. Many businesses with simple infrastructure and experienced staff have been so effective with remote set-ups that they have shed office space permanently and eliminated rent from the books. Others have embraced emerging technologies like virtual meetings and chat solutions to reduce the need for face-to-face interaction. In one way or another, most businesses were able to leverage this unique situation to improve their business processes, technology and personnel, and have embraced remote work at some level.

Ryan Foran, Cresa

But many businesses with younger, less experienced staff have reported ongoing struggles with recruiting, mentorship, culture development and staff retention. Some of these may have been amplified by complex external factors such as an ongoing labor shortage, an unprecedented resignation of our older workforce, and the looming threat of recession, however, most business leaders believe that they are the direct result of distance and a lack of face-to-face communication.

Today, by most accounts, the pandemic has entered the endemic phase and the consensus is that it is safe to get on a bus or train and go into the office. But after two-and-a-half years, many employees have grown accustomed to working remotely and, when polled, have stated that they will not return to regular office work until mandated, which isn’t recommended in today’s wide open labor market. So, what can you do? I wish I had a magic wand that could solve this problem, but I don’t — businesses will have to make some tough decisions. Here are some suggestions.

Have you considered the layout of your space? 

Many offices constructed prior to the pandemic are relics of a different era with high cubicle walls, low ceilings, dark corridors, minimal meeting/gathering spaces and low natural light. 

The office industry had been trending toward openness, exposed ceilings, low cubicles and maximizing natural light for the past few years but this trend was absolutely supercharged by the pandemic, and in particular, the concept of social distancing. It’s possible that your employees don’t like the office as it is, or don’t feel that it meets their needs.  

Have you approached your landlord? 

Sure, tenants reached out to their landlords in 2020 looking for rent relief but it’s a different market today. If you’re down to the last few years on the lease, consider striking a new deal now that adds term and generates an improvement allowance to make the changes that would make the office more inviting. 

If you like your building and want to stay but don’t need as much space going forward, consider relocating to a new space within the property that could be designed and built with you and your company’s future requirements in mind. 

If the options above don’t make sense, have you considered subleasing your space? If you determine that your employees simply aren’t going to come back to the office with any regularity over the next few years, then perhaps it makes sense to shed the office (and the expense) now and reconsider your position in the future. Many businesses have joined coworking spaces so they can maintain a business address and “clubhouse” for occasional team or client meetings. 

Ultimately, there are as many potential solutions as there are problems when navigating these unprecedented times, which requires business leaders to be honest and decisive. With all the variables at play, it has become abundantly clear that remote work will continue to have an impact on business forever. To what extent, only time will tell. 

In the meantime, if you are a decision maker and your office lease is expiring in the next 12 months, what should you do? Hold the line. As we emerge from perhaps the most employee-friendly labor market since Roosevelt’s New Deal, all indicators point to a looming recession that should even the playing field for employers. 

Job opportunities (especially cushy, remote ones) will become scarcer, and employees will finally respond to employer directives to return to work. And in another year or two, employers should be able to gather enough data on remote work, including its efficacy and prevalence, to make calculated decisions about their true requirements.

Ryan Foran is a senior vice president with Cresa. This article originally appeared in the October 2022 issue of Heartland Real Estate Business magazine.

Content Partners
‣ Arbor Realty Trust
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
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‣ Pavlov Media
‣ Walker & Dunlop

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