Willard Says...

January 10, 2022

The Office (R)evolution

By Jonathan Zimmerman

In your wildest imagination, could you have even foreseen a scenario in which the streets of Downtown Chicago would be zapped of its trademark energy, office buildings would generally sit dormant, and the concept of office space altogether would be openly debated as to its necessity? For most commercial real estate professionals, this is a scene straight out of The Day After Tomorrow. COVID-19 hit and this nightmare became reality. Nearly two years later, questions regarding how the office will be impacted on a long-term basis are really no closer to being answered.

Sure, a standard office has metamorphosed over time, but it has always been viewed as a constant and generally a necessity for most businesses. We have witnessed significant changes to offices sizes and their locations within the suite (interior versus along the window line) and a favor toward more open space. Corporate stuffiness has yielded to ping-pong tables and beer kegs. Dropped ceilings have been replaced with exposed ceilings. But however different the office became over time, it was always still there.

Yet at the onset of the pandemic when firms were forced to go remote, many firms survived and some even thrived. Then several firms gave up their offices altogether, hence the record amount of sublease space hitting the market. Can you imagine if this pandemic had hit in 1980 instead of 2020? The business might have never recovered. Talk of completely junking it all in favor of working from home would have been nothing short of blasphemous in the days before computers and internet.

Fortunately for those of us trying to put kids through school and making sure the mortgage is paid every month, it became apparent as time went on that remote work is not a long-term solution. On occasion and in certain situations, it is completely fine. Truthfully, there really isn’t a need for everyone to be in the office every single day. How offices are utilized is changing again, probably more radically than in the past, but that is okay. We can work with this.

A byproduct of all this is the Downtown Chicago has taken a pretty significant hit. With the exception of the seemingly indestructible Fulton Market, it is a challenge to find a building which has not experienced some pain. Occupancy is down across the board, operating costs and taxes are rising to levels never before seen, and many tenants understandably remain noncommittal with respect to their long-term plans. While these challenges abound, there are still some sizable leases getting signed (Exhibit A – Kirkland & Ellis 662,000 SF at Salesforce Tower) and properties selling at record high prices (like 110 North Wacker and just about everything in Fulton Market). Why is this, you ask? Because it will take a heck of a lot more than a pandemic to destroy the foundational base of Downtown Chicago. Too much money has been invested up to this point and too many people believe in the sustainability of our city. However, like the office itself, Downtown too will need to evolve in order to thrive for the next generation.

The recovery and evolution are interrelated, and it will take years for this to play out. The first step to recovery is getting workers back to the office on at least a semi-regular basis. Realistically, we have no chance of seeing a significant return until Spring 2022 at the earliest. Between the holidays, Omicron, and the cold and snowy winter weather, there are all sorts of valid excuses to delay the “Great Return.” If a manager or business owner has already been getting resistance from workers who wish to continue working remotely, good luck trying to persuade a return on a January morning when the temperature is 2 degrees with 6 inches of snow on the ground. Sorry, but a complimentary catered breakfast will not be enough, not matter how good the bagels might be.

Of course, this projected Spring return is contingent upon you-know-what getting under control. Every time it looks like we are over the proverbial hump, another variant gets in the way. What letter in the Greek alphabet comes after Omicron? Eventually, we will reach a point where around 75% of the workforce is using their office at least some of the week. This will be a significant milestone, as workers will start experiencing tangible evidence of the benefits of the personal interaction and collaboration which cannot be replicated over Zoom.

Once we learn to live with the virus as a regular part of life, we will then settle into the hybrid work routine. Some may choose to work 3 days in the office and 2 days at home. Others will come in just for meetings, perhaps when special projects are ongoing or during busy times each year (such as tax season for accountants, or summer for event coordinators). Slowly but surely, the attendance numbers will creep up over time. As soon as a co-worker who has been working predominantly from home witnesses another who has been going in 4 or 5 times per week get a promotion, this fear of missing out might encourage others to come in more regularly.

If getting people back to the office is the first step of the recovery, the second involves firms figuring out how to use their offices once back inside. Will there be a preference for more private offices and less open area? Will there be less personal space and more communal areas? Will these changes create a need for less square footage or possibly more to accommodate spacing out? Once there are some concrete answers to these questions — and it could legitimately take another two years or so to get to this point – only then we will see this so-called “new normal” kick in. At this point, we will see a greater level of comfort for entering into longer term leases.

Of course, the office evolution is multifaceted. Along with the aforementioned, the next key question is exactly where tenants will want to office: downtown versus suburbs, direct space versus coworking, new construction versus second generation space. If the choice continues to be downtown, are we looking at traditional markets such as the Central or East Loop? Or is it all Fulton Market from this point forward? If so, what happens to the older buildings? We will explore this topic in depth in our next blog.

Be sure to subscribe to our newsletter to stay up-to-date on the latest progress and pitfalls of the Chicago commercial real estate market. Subscribe to our weekly podcast, the CowCast, and follow us on Facebook, Twitter, and Instagram. For more information on Willard Jones and our offerings, contact Jonathan Zimmerman at 312.263.8787.