3 minute read
THE GOOD AND BAD OF OFFICE
When I was little, one of my favorite shows was Hee Haw. I even owned a pair of Hee Haw overalls when I was four years old. Yeah, yeah – make your jokes – I am very comfortable with my love of Hee Haw.
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I bring this up because they had a bit on Hee Haw wherein Archie Campbell, playing a barber, would regale his customer with some story. He would start out with a seemingly positive statement, to which the customer would respond, “That’s good.” Campbell would respond to that saying, “No, that’s bad” and follow up with a seemingly bad statement, to which the customer would say, “Oh, that’s bad”. Archie would then twist it again explaining why it was really good, and so on until they hit the punchline. Thinking about the future of office space is a bit like that sketch.
According to some, physical office space is over. Now that people can work from home, nobody will want to work in an office again. That’s bad for demand.
But it turns out, lots of people do want to go back to their offices – or else why would we be bothering with re-opening plans? So while some people never want to go to the office again, and some more like the idea of some flexibility in office or home work, many still prefer to go to work in an office. Even better, due to “social distancing” guidelines, those intrepid office workers are going to need more space than they had in the past. That’s good for demand.
But needing more space per worker means spending more money per worker. That will be coupled with spending more money on germresistant surfaces and additional janitorial costs. That makes office space more expensive. That’s bad for demand.
Of course, having the economy closed for a couple months has not left most businesses flush with cash, so how are they going to pay for the upgrades and the extra expenses? Do not ask landlords – they have been frantically trying to collect rent the last couple months, and they are facing a future where their real estate holdings might be less valuable. That might induce even more businesses to try the workfrom-home route, which means more vacant office space, which means cheaper office space, which is both good and bad for demand …
It is a tough nut to crack, folks. Common sense suggests that the demand curve for office space will bend downwards overall, at least at first. More people will work from home, but those who work in the office will need more space. Those two trends might cancel each other out, but a more prudent bet is that we will see at least a slight decreased in overall demand for the next couple years, and perhaps permanently. There has been a long term trend of office users using less space per employee for the last decade, and that trend will almost certainly continue.
Suburban office buildings, because they are located in less dense areas, may fare better than office buildings in dense downtowns. Suburban office is often less expensive, which also helps pay for necessary tenant improvements and increased common area maintenance. In the same vein, Class C garden-style office buildings, due to their lack of elevators and lower rents, may fare better in this environment than Class A office towers. Innovation and increased knowledge about COVID-19 could well intensify or diminish these trends, but they will likely persist to one degree or another.
