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The Future Of Office Properties In A Remote Work Revolution

Ari Rastegar is CEO of Rastegar Property Company, a vertically integrated real estate company with a focus on value-oriented real estate.

We all know the toll the pandemic and the resultant forced adoption of remote work has taken on office assets. Although demand is down compared to pre-Covid-19 levels, I believe office properties will not disappear. To that point, office occupancy actually increased in 84% of markets tracked by CoStar over the past 12 months. Office space will always be important because people are inherently social creatures and some of the best collaborations and inspirations emerge in person.

Despite the temporary lull in tenancy, savvy office operators and investors are finding new ways to attract tenants, maintain productivity and maximize occupancy and NOI. Now, we see newer office buildings with touchless entry and excellent air filtration as elements to promote wellness and safety and assuage employee health concerns in returning to the office.

Although occupancy has fallen compared to 2019, the climbing rates are stoking investor optimism. Let’s take a look at what’s driving the shift, why office is here to stay and how some operators and owners are repurposing empty office space to new highest and best uses.

A new norm suppresses office demand.

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The Covid-19 pandemic has brought substantial global changes in the working environment and approach of workers. Reduced hours, home offices and virtual meetings have forced nearly every economic sector to make significant adjustments to adapt to evolving collaboration methods. Fortunately, the situation has developed into a win-win.

A Stanford University survey of 16,000 workers over nine months shows working from home increased staff productivity by 13%. Employees also reported a 50% reduction in attrition rates and an improvement in job satisfaction. This outcome is due in part to reduced commutes and less stressful conditions that improve the quality of life for employees, allowing them to be more productive.

Moreover, permitting—or even encouraging—workers to work from home has saved businesses a lot of money over time, particularly in terms of leasing expenditures. As a result, many firms have reduced or closed their offices, heavily impacting the commercial real estate sector.

Out of sight but not out of mind—office is here to stay.

The workplace can considerably affect personnel’s perception of a company as well as their professional and personal development. Furthermore, many industries premise their operations on an in-person work culture or encompass business aspects that are difficult to implement remotely. The legal industry, for example, has been recording above-average office occupancy post-pandemic. Consequently, office occupancy in some major U.S. urban areas recently topped 36.4%.

Additionally, the emergence of new work models—such as “hub-and-spoke” (central office in the CBD and smaller satellite offices in burbs), coworking and shared office spaces—has caught the attention of many companies. These solutions provide flexible, cost-effective alternatives to traditional office spaces and better meet the needs of this new style of working.

The pandemic also created “hotelization,” a modified offshoot of office remodeling, to accommodate the hybrid work requirements of employees and comply with new health protocols. For instance, physical distancing measures have prompted businesses to reconsider their office layouts. Such layouts include the removal of heavy-traffic shared spaces, public kitchens and high-touch surfaces. Other byproducts of these measures include updating air filtration systems and setting up automatic access points to limit contact.

For those properties where recovery isn’t likely, operators have also considered transforming their office structures into alternative uses.

Adaptive reuse is a simple yet ingenious pivot.

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Office conversion has become a common undertaking for landlords in the post-pandemic era. As traditional office spaces no longer fit the needs of many companies and professionals, converting them into other kinds of real estate assets became a viable option during the health crisis.

Residential uses are among the most practical and prudent in my opinion. RentCafe estimates that former office space accounted for 41% of residential apartments conversions in 2020 and 2021. In other words, over the past two years, about 13,250 new rental units have been developed from old office space, with an additional 12,300 units expected in 2022. Many offices were also turned into air-conditioned industrial distribution and live-work-play centers.

Equally significant, compared to demolition and new building, adaptive reuse has a lower environmental impact, costs less and is faster to complete. It also addresses a variety of housing affordability and low-vacancy challenges in some of the most congested and expensive cities in the U.S., thus raising demand for new units.

Synergies were catalyzed by the crisis.

The pandemic has triggered a dramatic shift in corporate and employee attitudes toward the work environment. While office-based work is back, remote work is here to stay. As a result, companies have begun to restructure their workplaces to suit their employees’ mixed work requirements.

By capitalizing on tenants’ dynamic expectations, office owners can take advantage of the market, improve their ESG profile and optimize their overall cost structure.

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