Market snapshot: Tenant considerations for office

Andy Cullen
Managing broker,
Tributary Real Estate

While the pandemic has changed many aspects of our society in a short amount of time, the substantial impact on the office market is among the most staggering for the commercial real estate industry. Within days of shelter-in-place orders, thousands of businesses around Colorado emptied out their offices and settled into a virtual workplace routine, many expecting to be back within a few weeks. Six months later, companies still are grappling with the new realities of virtual work arrangements and trying to navigate their office leases to accommodate an unknown future.

For the first time in 13 quarters, Denver’s office market registered negative net absorption in the second quarter. As many companies focused their attention (and their wallet) elsewhere, sublease availability sharply increased by 33.3% to 3.4 million square feet in Denver. With total construction volume reaching 3.7 million sf, up 49.8% year over year, more office will be introduced in the near future, potentially creating a scenario in which supply significantly outweighs demand – a reality that would have seemed unfathomable just six months ago.

How companies will operate in a post-COVID-19 world still largely is unknown. However, given Denver’s continued popularity as a secondary market, even throughout the pandemic, the impact on the office market here likely will be more nuanced than in places like San Francisco or even Austin, Texas. Denver didn’t even crack the top 20 U.S. markets that saw the biggest drop in demand in the second quarter. While virtual meetings, home offices and animal coworkers may temporarily remain the norm, it is clear the office – at least in this market – is not dead.

In finding a path moving forward, there is not a one-size-fits all approach. A company’s plan for this next phase will vary depending on their needs. Strategies and considerations in the short term likely will include a combination of the following:

Re-evaluating office space needs. Denver office tenants still are exploring various measures to mitigate the financial effects of the pandemic. Regardless of their size or circumstances, companies across the board are looking for ways to reduce costs, including subleasing their office space.

If only 50% of an office space is being used on a given day, the goal then becomes determining how and where to space employees safely and how to sublease with the least disruption to operations. Dozens of companies are exploring this option. In downtown Denver alone, there are 17 active subleases that are 20,000 sf or larger. Five of those are larger than 50,000 sf.

Companies in larger high-rise buildings have been more reluctant to come back to the office because of the number of potential touchpoints for employees between their homes and desks – including commutes, traveling in elevators and using common areas. As a result, many of these companies are planning to maintain a virtual office environment, or at least a hybrid model that allows small cohorts to work in person safely, for the foreseeable future.

Investing in new collaborative technology. While many of our clients anecdotally report employees are suffering from “Zoom fatigue,” or the exhaustion and stress felt when consistently connected on video chat, the fact remains that technology has been a primary means to connect during this age of social distancing, which has rapidly accelerated the rates of adoption across industries.

Many companies are making necessary investments in technologies that promote collaboration and productivity. While there are free tools available for limited operating budgets, some companies are making substantial investments, which they see as an investment in a new kind of work environment. Providing employees with the flexibility to work remotely long-term may translate into a smaller office footprint with fewer dedicated desks or workspaces in order to balance out operating costs.

Long-term considerations. The majority of our clients have been waiting to see what happens with the pandemic before making any long-term decisions regarding office space. In the interim, many are choosing to extend their current leases by nominal amounts or going into subleases. Very few are scrapping the idea of the office altogether.

On the contrary, some clients see the current market as an opportunity to secure more favorable lease terms. This might include shorter terms and additional concessions like free rent, increased tenant improvement dollars and supplemental allowances that tenants can use on items that typically are out-of-pocket for them (i.e., moving costs).

In other cases, long-term design plans have been postponed as companies are hesitant to make a financial investment in drastically revising their carefully developed plans. When it does come time to rethinking the office of the future – whether virtual, hybrid or traditional in-person – if this pandemic has taught us anything it is that flexibility is key.

In the months and years to come, a number of factors could affect the office market, and no one knows exactly what it will look like. But as companies continue to figure out the best way to maintain their teams, real estate will continue to play a vital role in that process.

Featured in CREJ’s September 2020 Office Properties Quarterly