Creative Alignments, a recruiting firm, took a wait-and-see approach to bring its 30 staffers back to its offices in Boulder, Colorado, for most of last year.
But with the COVID-19 pandemic raging, the company decided to allow its lease to expire in January and let employees continue to work from home. Company executives have debated whether to lease new space, but so far are reaping the benefits of staying virtual, including being able to hire talented candidates across the country, says Shenna Fitzgerald, Creative Alignments’ marketing director.
COVID-19’s delta variant, which has caused cases to surge, has solidified the firm’s decision to stay remote, though executives haven’t ruled out revisiting the question down the road.
“Had more people gotten vaccinated,” the company may have considered renting another office, Fitzgerald says. “But that quickly changed with the delta variant.”
While many businesses are agonizing over when to bring employees back to their offices amid the spike in COVID-19 cases, some have sidestepped the dilemma by simply closing some or all of them.
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The trend foreshadows an office market that will likely be at least somewhat diminished for the longer term, bruising the restaurants, bars and shops that rely on white-collar workers’ spending to survive. The shift also could affect the broader economy by increasing defaults on commercial loans and reducing city tax revenue.
Sixty-six percent of organizations surveyed by Gartner late last month are delaying reopening their offices due to COVID-19 variants. The number of employee office visits in 10 large cities recently reached just 31% of their pre-pandemic level in 10 large cities, down from 33% in late August, according to Kastle Systems, which tracks employee swipes of devices such as key cards.
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Some say bye to office life
A recent poll reveals a surprisingly high share of businesses giving up office space altogether.
Thirty-seven percent of companies have permanently closed all their offices since March 2020 while another 32% have relinquished some of their space, according to a survey of 1,250 business owners conducted last month by Digital.com, a technology consultant for small firms. Forty-five percent of companies with more than 500 employees have closed all their offices, compared with 35% of smaller businesses, the survey shows.
“The lockdowns have only accelerated what already has been happening for years,” says Dennis Consorte, a small business consultant for Digital.com. “We have been moving toward remote working for decades.”
Most of the businesses surveyed said the main reason they went virtual is that most of their employees want to keep working remotely. They also cited cost savings, health concerns and the fact that employees are at least as productive, or more so, when telecommuting.
Top real estate research firms such as CBRE Group say the Digital.com poll overstates the damage the pandemic has inflicted on the office landscape. A PricewaterhouseCoopers survey early this year found the vast majority of executives are planning a hybrid setup that has employees working in the office at least some of the time, suggesting many could give up some of their office space as employees share cubicles. But just 13% said they would go all virtual.
Only about 6% of 185 companies surveyed by CBRE Group in April said they planned to allow employees to be fully remote.
Yet as many as 45% of Americans prefer to work from home full time, according to a Harris Poll survey for USA TODAY in May. Severe worker shortages could force some companies to let more employees work remotely to compete for talent, says Julie Whelan, global head of occupier thought leadership for CBRE Group, a real estate services and investment firm.
Vacancy rate rises
Fitzgerald, of Creative Alignments, says many job applicants are only seeking remote positions. Since shifting to an all-remote workforce, the company has hired employees in Oregon, North Carolina, Chicago, Idaho and Florida, Fitzgerald says. The change also has allowed the company to tap into a more racially diverse pool of candidates that isn’t available in Boulder. And since the company has expanded its client base nationally in recent years, it has become less tied to the city anyway.
There’s no doubt that professional services companies are shedding office space, top real estate firms say. The question is, how much? The office vacancy rate reached 18.5% in the second quarter, the highest since the early 1990s, and is projected to rise to 19.1% by 2023, according to Victor Calanog, head of commercial real estate economics at Moody’s Analytics.
But even before the health crisis, the rate was historically high at 16.4%, Calanog notes.
And real estate industry executives note things are improving. Leasing volume in 54 major markets was about 78% of normal levels through the first seven months of this year, according to CoStar Group, a commercial real estate research firm. That’s up from 50% last year.
Vacancies, however, don’t fully capture businesses’ plans to shut down offices because many continue to lease space until the term expires to avoid hefty penalties. That space, in turn, is categorized as occupied even if no one is physically there, Whelan says.
Last fall, Windmill Strategy, a web design company based in Minneapolis decided to permanently shut its 2,500-square-foot office and let its nine full-time employees work from home. But the firm still has been paying the roughly $65,000 a year rental costs until the lease expires in February, says company principal Kathy Mrozek.
“I’ve tried to negotiate out of our lease early but the landlord has no incentive to do so,” she says.
For staffers, working from home means fewer distractions, a better work-life balance and improved working relationships with the six to 12 contractors who were already telecommuting, Mrozek says. She plans to maintain the company’s culture and camaraderie through a couple of annual retreats.
A telling measure of future office shutdowns is the amount of office space tenants are trying to sublease – a sign that they’re not using it and may well surrender it when the lease expires. In July, 162 million square feet of office space was available for sublease, up 77% from the pre-pandemic level, Whelan says. That represents about 4% of all U.S. inventory, up from 2.1% in 2019, according to CBRE. The total also tops the peak during the Great Recession of 2007-09, CoStar says.
Subleased office space is typically discounted, sometimes significantly. But the total recently has dipped and likely has peaked, Whelan says.
ClubDrive Systems, of Atlanta, a cloud services company, has subleased all its offices but is recovering just 42% of its leasing costs, says CEO John Alston. When its own lease expires next July, the firm will save the entire $125,000 annual leasing expense. The company, which had 15 employees pre-pandemic, is down to five and has laid off other staffers, such as a help desk representative, outsourcing their duties to another firm.
“We just said we’re going to embrace this – we’re never going backwards,” Alston says. “I can reduce the cost significantly.”
Alston says clients were comforted by ClubDrive System’s office presence and network operations center with a dazzling electronic wall display showing how smoothly its services were running. But since the pandemic began, “They don’t really care where you are. No one can visit you anyway. They don’t care as long as you’re getting it done. It’s a complete mindset shift.”
Other companies have no plans to surrender office space. Liberty Inspections, which does home inspections, gave up its offices in Media, Pennsylvania, when the lease expired in March 2020 but purchased a similar-sized office building in January for its five or six administrative employees, says CEO Chris Early.
“They missed being in person and for some, working from home was not a good solution due to children and other home distractions,” Early says. He adds, “It’s hard to have culture without people getting in front of each other.”
What’s the bottom line?
There’s little doubt companies are less reliant on offices. The share of leases under 50,000 square feet has made up 82% of activity this year, compared to 75% historically, according to CoStar. And 72% of the companies surveyed by CBRE expect their real estate footprint to be moderately smaller over the next three years while 9% expect it to be significantly smaller.
With employees projected to spend an average of 1.6 days working remotely after the pandemic, up from one day pre-pandemic, Whelan estimates companies will need an average of 9% less office space per employee. As a result, the amount of office space in use across the country will almost certainly shrink.
But that will be partly offset by strong job growth in the recovering economy, Whelan says. Also, companies need to reserve more space than is needed on a typical day for peak-time usage. And as employees trickle back to the office, businesses will devote more space for collaboration than they did before the health crisis, she says.
“While the office market will continue to languish in the near term, recovery will commence as tenants begin to use their space more regularly and new job creation boosts the market overall,” she says.
This article originally appeared on USA TODAY: Businesses permanently close some offices during COVID pandemic