How office spaces are changing as hybrid work takes hold

JLL America CEO John Gates joins Yahoo Finance Live to discuss data on hybrid work arrangements, how office spaces are being redesigned, the importance of amenities, and how tech companies are considering their real estate footprint amid an economic downturn.

Video Transcript

BRAD SMITH: New hiring beginning to pivot away from the pandemic norm of fully remote positions as large companies continue to form return to office policies. For a deeper dive on office demand and reentry, we've got John Gates, JLL Americas Markets CEO. John, good to have you here with us. What data are you looking at and seeing for some of what you're calling the mid-week crowding of hybrid employees, 5% to 10% higher attendance, and the return to office being perhaps a little bit more crowded than perceived?

JOHN GATES: We do a lot of client surveys, and we have access to batch life data, which is security access badges to get into office space. So you can track it that way. And we pay attention to sublease space that's on the market, meaning space that a company controls that they no longer want to occupy. So they'll put it out for sublease on the market. So we've got various data sources.

JULIE HYMAN: When we're looking at the changing face of what this office-- new office looks like, and you're looking at hybrid workers, how are tenants dealing with this? In other words, if you know you're going to have like Tuesday and Wednesday be the busiest days in the office, how do you adjust as a renter or as a leasor, as a company, your footprint with those shifts in traffic, just for a preponderance of, like, a few days?

JOHN GATES: Yeah, we're still trying to figure that out, is the honest answer to that question as we shift. But you just made an important point. What we're seeing is for organizations that have allowed some form of hybrid working. Their people tend to be in on the same days. And they are for good reasons. They want to be together. That's part of the point anyway, to collaborate, to have meetings, to kind of get to creative energy. But if they're all in on the same days, then you need close to the same amount of space.

We are seeing some changes in space design to have more collaboration space and team space and work together space. And then of course, amenities have become very, very important. So there's all types of amenity space that are in office buildings today.

BRIAN SOZZI: John, a lot of big companies. We've been talking about Salesforce all morning long, but they're closing a lot of corporate office space this year. What is the outlook for rents?

JOHN GATES: Well, technology companies tend to expand faster and then they can track faster in all cycles. I was just looking at some data this morning. If you go back to mid-last year, tech companies were about 12% to 15% of the sublease space that was out there, and it's now over 50%. So leasing activity is down. We had not fully recovered in terms of total leasing volume post the start of the pandemic, but it had been creeping back up to about 70%, 75% maybe even in some places. And it's ticking back down to maybe 60% of pre-pandemic levels.

And when you see that happening, typically, you would see rents fall. The one exception that we see right now is when companies are transacting, they're going into new, very nice space, in part to draw people back to the office. So it's almost contradictory in terms of market environment, but we still do see very high rents in office leasing in most markets. We see peak rents in some cases because the leases are going into brand new buildings.

BRAD SMITH: Yeah, we're hearing about restructuring of costs. And that impacts, of course, employees when companies are announcing some of the larger layoff plans. So that also impacts perhaps the seat counts that are necessary within the office environments that they do have. Do you see any perhaps even churning of one office environment or one space into another one, as companies are downsizing, or as they've called it, rightsizing some of their base, too?

JOHN GATES: Yeah, if someone has the opportunity to do that, consolidate in a place and put other space on the market to shrink their overall footprint, they would be doing that. That's not something every organization has the space to do. I mentioned the metric on technology companies broadly having over half of the sublease space that we see in the United States markets on the market, which is a huge shift. They tend to take space fairly quickly as well to meet future hiring plans, so that industry sector would be the largest that could shift and do what you just described, meaning consolidate into existing space and put excess space on the market.

JULIE HYMAN: John, besides this sort of tangible of how much space people are taking, what they're paying, et cetera, what's the biggest change that we're seeing within the office? Anything on the configuration front, for example?

JOHN GATES: Yeah, there's more collaboration space, as I said earlier. So individual space, you have less of that overall and a lot of breakout rooms, collaboration rooms, whiteboard rooms, for meetings and managing that. And then the amenity space, that's really accelerated in the last few years. We have a neat kitchen on every floor.

Down in the common areas of the building I'm sitting in, there's a golf simulator. There's a very good workout room that the tenants of the building can use. And that's become very commonplace. There's-- we have a coffee barista that is within our space that our people have access to. And that would be fairly typical of what you see is lots of amenities to make it a little more exciting, a little more fun when folks come back to the office.

BRIAN SOZZI: John, what's your address? Me and Brad want to head over there.

JOHN GATES: [LAUGHS] I'm in Dallas, where we're lamenting a football game that happened last night.

JULIE HYMAN: Oh.

BRAD SMITH: Oh, the Philadelphian Eagle in me is so sad for you, John. I'm sorry. But at the end of the day, too, you brought up the amenity side of this. And for what I was thinking naturally was, what is getting people back into the office, besides the kind of return to office perhaps mandates that some employers are putting out. If there is one thing that's enticing people to spend more time or to come back into that office experience, what concessions are employers also giving up there?

JOHN GATES: The biggest things that are working are food of some form and then social gathering. So if a senior executive is in town and so we're going to have a mixture at the end of the day or a happy hour, that's when we see the biggest spikes, and then many organizations providing lunch several days a week, and/or, as I said, things after-hours. So it's food and social gathering are the top of the list.

BRIAN SOZZI: John Gates, JLL CEO of Americas Markets, good to see you. Thanks so much.

JOHN GATES: Thanks for having me.