PropTech Challenge and Yacht Party, Nov. 29th | NYC REAL ESTATE TECH WEEK →

Landlords Who Want to Fill Their Empty Offices Should Consider Furnishing Them

Workplaces look very different now than they did just a few years ago. Corporate occupiers have so much more design choices to pick from as they prime their spaces for the return-to-work push: a coffee shop ambiance, dynamic layouts with color-coded quiet zones, biophilic spaces, and even workplaces that look like libraries. With so many options, there’s no clear answer with what occupiers want their spaces to look like. But, what is becoming more and more consistent is that occupiers are wanting their landlords to spare them the headache of furnishing their workplaces.

Over the pandemic, concessions like reduced rent, rent abatement, delayed commencement dates, customized lease periods, and an increase in tenant improvement allowances became the norm in commercial deals. But according to Chris Okada, CEO of Okada & Co., a commercial real estate agency in New York, corporate occupiers are also asking their landlords to bundle in furniture into their leases as well. “People are looking for furnished spaces, that is a popular request we’ve seen,” he told me. “A lot of people are looking for furniture strategies to be included in their lease, meaning that they’re asking for the landlord to take care of it.” 

The increase in occupiers turning to their landlords to provide desks, chairs, couches, and other office furniture might be attributed to the nightmare that acquiring furniture has become. Prior to the pandemic, contract furniture, or commercial-grade furniture, was widely beholden to customized manufacturing. Occupiers benefited from an endless array of options for their contract furniture requirements. Nearly all of the details, including styles, fabrics, coatings, and frame materials, were totally customizable to produce distinctive interior landscapes. Since lean manufacturing procedures were the norm of the industry, manufacturers were able to produce these customized pieces that matched any specification. This meant that inventories and stockpiles were generally kept to a minimum.

Then, COVID showed up to ruin the party.

Supply chain disruptions have turned the task of ordering furniture into a massive headache, and many manufacturers are still behind on their backlogs. In fact, furniture manufacturing is one of the biggest casualties of the catastrophic domino-effect that the pandemic set on the global shipping and supply chain. Not only is the industry grappling with longer wait times to receive raw materials to make their products, the cost to ship them has become astronomical, forcing retailers to up their prices by as much as 1,200 percent, the Financial Times reports.

Furniture, especially commercial grade furniture that’s built for higher durability standards than furniture intended for residential use, is generally heavy, hard to move, and more intricately built than most other products. The cost to ship a piece of furniture, whether it be an office chair or an ornate armoire, is much larger compared to most other retail products. Steve Carson, Chief Executive of ScS (a home furnishing retailer in the United Kingdom), told the Financial Times that “if you think about the size of an iPhone and how many of those you could fit in a [shipping] container and you think of the size of our things, the cost per product really does shoot up.” Before the crisis, ScS was paying $1,500 per container to ship their sofas from Asia to the UK. After the pandemic mired the supply chain, ScS paid as much as $20,000 per container. 

The office market is already in a tight spot, and office landlords with empty space to fill are more keen than ever to offer concessions to fill their spaces. Though some companies are feeling the need to expand their office footprints, many companies are reshaping their office strategy to better suit their employee’s attitudes. That means shorter leases or smaller spaces. Couple that with a national labor shortage, and office occupancy rates are sluggish to creep up.

Data pulled by the Back-to-Work Barometer, developed by access control company Kastle Systems, showed that the average occupancy rate for offices in 10 major U.S. cities is barely teetering above 44 percent. This was supposedly big news because office occupancy had previously hovered around 43 percent for over two months. An announcement from Kastle Systems explained that the consistency of offices sitting at less-than-half capacity “may be the new normal for offices nationwide.” Kastle Systems does expect occupancy rates to increase, but at a glacial pace. 

Offering to foot the bill for tenant’s office furniture was a creative way that New York City landlords ushered new tenants into their buildings last year, but the fact that the trend is still going strong actually speaks volumes about how much of a hassle it is to get furniture right now. In the wake of the pandemic, occupiers would only commit to shorter and shorter lease agreements. Having to outfit an entire office, that may only be in use for a brief period of time, with furniture may not have seemed worth the effort for the occupier. Hence why landlords offered to do so for them.

Leasing furnished office space has remained a solid tactic to be able to lease the space. Okada & Co. found that when it came to spaces over 5,000 square feet, rent being equal, furnished spaces got a whopping 47 percent more showing requests than unfurnished spaces. “Ultimately,” Chris Okada concluded, “offering furnished spaces results in a faster lease process.” But putting the onus of office furniture on the landlord just means that landlords now have to deal with the same pain points of prolonged wait times and inflated prices that occupiers are looking to avoid. 

Fortunately, there are some helpful options out there. Firstly, a landlord can avoid the supply chain issues altogether by offering a generous furniture allowance. The occupant would still need to jump through the current hoops to get their furniture, but the allowance itself can help the occupant mitigate the inflated furniture prices. 

Another option that landlords have are third-party companies that offer furniture-as-a-service. CORT, a furniture rental company that specializes in commercial properties, pointed out in a blog post that one way to cope with furniture supply chain issues effectively is to understand that furniture can be an asset mix of permanent pieces and temporary ones. Rental furniture companies typically have a higher inventory compared to many furniture manufacturers, which made the sector a tad more resilient to the supply chain crisis. Wait times are much lower for furniture rentals, and landlords can opt to use rented furniture until the more permanent fixtures can navigate through the backlog. 

Today, the office market is trickling back, and occupiers have more confidence in the state of the office market in the long-term. Yet the contract furniture industry is still a mess. Depleted inventory, long wait times, and the inflated cost of contract furniture means the landlord who’s able to provide a space that’s furnished (or a generous furniture allowance included in the lease) has a huge leg up in the market.

Image - Design