COVID-19 and the New Normal for the Office Market

By: Joshua Levering, SIOR, Senior Vice President, NAI James E. Hanson

The swift spread of COVID-19 has shaken up every aspect of our daily lives. With millions of Americans now working from home and companies facing a dire financial picture in the months and years to come, the impacts on our regional office market could be deep. Experts anticipate that by summer our economy will be on the path towards reopening, but what will that new normal look like for the office market in northern and central New Jersey?

Over the past several years, our area’s office market had steadily diverged, with high quality, well-located office product seeing high absorption and low-quality, functionally obsolete space struggling to find tenants. Although the overall vacancy rate hovered in the low to mid-teens, that did not paint the whole picture as low-quality space drove a high percentage of the vacancy rate.

Right now, COVID-19 has placed a pause on that trend as no new deals are coming to the market for office product of any quality. However, over the next 6-12 months, as the economy picks up once again. I expect two trends to emerge:

1. Tenants will be taking a deeper look at their business models and workspaces to make sure they still “work” in a post-COVID-19 world

Many companies are learning for the first time that they their employees can work from home with minimal disruptions to their day-to-day business. Additionally, concerns about social distancing and building design will reshape the prototypical office space over the next several months. Due to both reasons, I expect tenants to take a much deeper look at their real estate needs and sharpen their pencils to make sure the numbers and spaces still work for them. For owners of any office building, this will inevitably make those next renewal conversations a bit tougher and could drag out new lease negotiations.

Through this deeper level of analysis and restructuring, I can also see many office tenants learning that they can save some money on real estate costs through decreasing their space or eliminating it entirely. But not every employee wants to work from home or is able, so most companies will likely still need physical locations.

2. Decreasing demand for office space and the move towards a decentralized office model will deepen the gulf between quality and non-quality office product

With the decreasing overall need for office space, the decline of lower-quality office product will only hasten. For the owners of these types of buildings, the best advice I can give is to crunch the numbers to see if aggressive repositioning works or take a look at how you can redevelop the property into an asset class in higher demand.

However, higher-quality buildings will be well-positioned as we emerge from COVID-19. As more employers adopt work from home policies, they will be looking to decrease their space allotments but might be looking for less space in a better-quality building.

The appeal of higher quality, well-located buildings could also be influenced by a move to decentralize office space similar to the hub and spoke model we have seen in the industrial sector.

As companies recognize that they ultimately only need their offices for customer servicing operations and other limited in-office needs like meetings, they could look to create smaller regional offices versus one larger headquarters. The advantages of this approach are two-fold – shorter commute times for those that have grown accustomed to working from their home while more local offices will also accommodate for employees who might remain leery of using mass transit to commute into New York City or other large urban centers. Secondly, companies would have smaller, more flexible real estate footprints that can quickly adapt with their businesses. This presents owners of well-located, high-quality office space with a great opportunity to diversify their tenant base and move to a multitenant approach if they have not already.
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Over the next several quarters, the office sector is primed for drastic changes as the way we work undergoes a dramatic transformation brought on by COVID-19. Navigating this new normal will not be easy for either tenants or owners as uncertainty will continue to be a defining feature of the market for quite some time. With decades of experience in closing office transactions in a variety of economic conditions, the team at NAI James E. Hanson stands ready to provide counsel to clients to help position them for success in the post-COVID-19 world. To learn more about our office leasing and sales services, please contact me at [email protected].

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