In nearly four decades in commercial real estate, Joe Markling has seen a lot. “I’ve lived through, what, four or five recessions now? I’ve lost count,” he says. He has also seen the industry undergo a couple of radical transformations. One is the open floor plan, built out on large plates and no columns to enable flexible configuration and higher density. The second, which happened concurrently, is the amenitization of the office.
As commercial offices grapple with the future of the knowledge workplace after COVID-19, Markling knows which of these long-term trends he would bet on to continue. “Those offices with no individual space or privacy, we will probably not see those again,” he says. “But the amenitization will only get more dramatic. I don’t see people returning to zero-amenity workplaces.”
Workplaces Going Hybrid
This is a bold statement from Markling, Managing Director and Head of Real Estate Operations for USAA Real Estate, especially in light of the outlook for office buildings, most of which are currently operating at extremely low physical occupancy. As for the future, there are troublesome signs, including a KPMG report suggesting that CEOs are largely embracing the idea of long-term remote work. Approximately seven out of ten of them now say that remote work broadens their talent pool and that they plan to reduce their office footprint as a result.
Even if the industry avoids catastrophic lease vacancy—if, for example, social distancing requires workplaces to de-densify, housing fewer workers in the same amount of leased space—it seems likely that commercial buildings will house fewer daily occupants for some time. The emerging model for many erstwhile occupants looks increasingly to be a hybrid of at-home and in-office, with workers spending varying time in each location.
But as Markling points out, uneven physical occupancy is not exactly a new concept. Back in the halcyon days of business travel (also known as “2019”), it was not unusual in some industries for tenant suites to be, say, 70-75 percent occupied on Monday, 60-65 percent occupied from Tuesday through Thursday (traditional travel days) and 40-50 percent on Fridays. In some professional services firms, the pattern could be even more extreme, with people working at client sites during the week until returning to the home office on “fly-in Fridays,” resulting in a survey to 80-90 percent occupancy on those days.
It will probably take a while for occupiers to figure out the right amount of fixed and flexible space to accommodate their newly hybridized workplaces. For the buildings, the challenge will be different.
“The shops, bars and restaurants, and services we’ve put in buildings primarily take traffic from the occupants,” he says. And they have not been designed to accommodate COVID-driven behaviors. “They are intended for people standing and milling about, somewhat casually and somewhat densely–exactly what we’re not supposed to be doing in a pandemic.” Moreover, Markling believes that a certain percentage of office workers will permanently change their behavior, essentially remaining uncomfortable in crowded spaces. Existing amenities, then, are primed to suffer.
How does Markling square this with his assertion that commercial buildings will, if anything, only become more amenity-driven? One reason is that the people who do come to the office will need them. Whether it’s exercise, lunch, or a morning caffeine fix, office workers will still want convenient access, and buildings will keep offering it in the name of competitive advantage.
For a typical commercial office building, retail amenities generate only a small fraction of operating income compared to rent from office tenants. In many cases, they are essentially a breakeven proposition for the building owner. If tenants valued a particular amenity, then, Markling believes owners would be willing to absorb a small loss on it, effectively subsidizing the amenity for the sake of attracting and retaining office tenants.
Time for Creativity
None of this is to say, however, that future amenities will look the way they always have. For one thing, they will need (and want) to accommodate those who will take a long time to regain comfort in crowds. “There was already a lot of technology to enable the logistical and transactional part of retail to reduce the need for waiting in line,” explains Markling. That should accelerate, he believes, because the same technology reduces the need for direct contact to fill orders. “We’ve seen restaurants offer curbside service just to survive,” says Markling. “That will probably remain some percentage of their business in the future, and the same is true of the shops in a building lobby.”
Software providers are making the pitch for their products to connect and enable a cohesive package of amenities, with their own apps at the core. This includes everything from food delivery to information and work order request fulfillment. USAA is piloting one such tenant experience product at its own headquarters to test the value.
Technology also offers the possibility to provide more variety in tenant amenities, especially for properties that may not have much dedicated amenity space. Becky Hanner, Principal of Hanner Commercial Asset Services, sees the post-COVID workplace as an opportunity for mobile amenitization. “Workers are not going to want the hassle of going out,” she says. “Instead, they’re going to want everything to come to them.” According to Hanner, there could soon be a proliferation of truck-based amenities including blood drives, antibody tests, hair and nail salons, chiropractic care, and many others in addition to the proven example of food trucks. Technology makes it easier to package this together, but building owners and managers themselves are best positioned to think creatively about what will serve their tenants best.
The anticipated hybridization of home- and office-based work also presents an opportunity for entrepreneurial building owners and managers to serve tenants who may soon experience a very different occupancy pattern. While their average daily occupancy may settle at a lower level than before the pandemic, many of them will likely need the occasional “all hands on deck” day. As occupiers think about the core reasons for gathering their employees in the office, they may find they still need large meeting spaces for training, corporate events, strategy sessions, and other specific purposes.
In the past, they may have shoehorned everyone together at headquarters. But landlords may start treating flexible space as an amenity unto itself. “Some of the biggest real estate companies had already created their own co-working spaces,” says Markling. “The technology is finally at the point where it can work for them.” He suggests that, in addition to viewing such spaces as high-margin, short-term revenue generators targeted at small businesses, they could also be deployed as a subsidized amenity for existing tenants. “It will be interesting to look at the usage numbers for those spaces in, say, 2021 versus 2019.”
Joe Markling believes that for those who will keep coming to the office—whoever they are and however often they come—convenient amenities will remain a key part of the experience. “Amenitization has radically changed the office in the last couple of decades,” he says, and he believes its impact will outlast much of what the COVID-19 pandemic is doing to shake up the way commercial buildings work. “We may see changes around the edges [from COVID], but the monumental change of amenities has already occurred.”
Whenever we’re ready to go back to the office, the sandwiches, shops, and services will be waiting on us in one form or another.