Republished with permission from connectcre.com.
To say that the office sector is facing a period of transition is an understatement. Fortunately for all stakeholders, qualified SIORs are ready to provide guidance on their next moves. Connect CRE reached out to SIORs on both the leasing and investment sales sides to share the advice they’re currently providing to clients. Here are insights from David Lockwood, SIOR, COO of Colliers International in South Carolina and SIOR Global President-Elect; Matt Sultenfuss, SIOR, managing partner of Avocat Group and SIOR Regional Director, South; and Cathy Jones, SIOR, EVP with LOGIC Commercial Real Estate and SIOR Global Treasurer.
Q: In discussing future office use with both owners and occupiers, what is the general consensus among each group—or does the outlook vary, especially among occupiers who may have very different views of what their long-term space requirements will be?
Lockwood: We are in an office market that is changing and evolving in real time. There is no clear consensus among occupiers as to what spaces should be and what they should look like, beyond the fact that many employers have determined better quality space is the key to hiring and retaining employees. The flight to quality has been real in many markets, but not all of them. Occupiers have traded square footage for higher quality space by condensing their footprint but adding more amenities within the space to give the company an edge in hiring young professionals.
In some markets, Class A space has tightened and options are limited, leaving companies in a dilemma as to what to do next. These occupiers are hesitant to extend leases in inferior space since this may be a deterrent to hiring and retaining employees.
Sultenfuss: In my almost 20-year career as an exclusive tenant rep, I have never seen the outlook for the future of office space vary so much between owners and occupiers. The outlook for the future varies for different office building owners—the newer Class A office buildings have seen record rent growths and extremely high occupancy levels, so those landlords are very optimistic about the future. Some Class B and C owners have a very different outlook, especially if they have large blocks of leased space expiring in the next couple of years.
Regarding occupiers, while some common themes emerge, it's essential to note that their views can vary significantly depending on factors such as industry, company size, work culture, and long-term strategies. Some occupiers may still prioritize traditional office spaces, while others may be more open to remote work and alternative arrangements.
Q: In working with clients (whether as sellers or buyers), what do you hear as their key concerns about completing transactions in the current environment (e.g., the bid-ask spread, financing, etc.)?
Jones: There are two primary concerns in the current investment sales market:
- Cost of lending: The cost of lending has increased significantly. Another factor is that the number of lenders willing to lend has decreased. In some product types, such as office, the decrease represents the majority of lenders that in the past would lend for this product type. The challenges in lending have had a direct impact on the second concern:
- Bid-ask pricing spread: We have started to see sellers lowering their pricing expectations, but not to the level that buyers need to achieve their current yield requirements. There are also some buyers on the sidelines waiting for deals they expect to materialize when owners are facing debt renewals without the capital and staying power to address the refinance options.
In addition, there are now competing investment options for investors. They can invest in treasuries, money-market accounts, and other stable investment options, and earn a good return while waiting out the pricing spread. They do need to take the long-term outlook into consideration with this strategy, as many of the real estate options have growth in the returns over time, which may or may not exist in the other options.
Q: What type of guidance are SIORs providing to office owners in terms of attracting and retaining tenants?
Lockwood: Brokers should be actively working with their owner clients to fully assess office properties. The SIOR broker is a knowledgeable advisor in these situations, guiding owners on what must be done to win tenants, or in the analysis of what the future may hold for an office property that is struggling to keep occupancy levels at an acceptable point. In many situations, the assessment may lead to a discussion of alternative uses of the property.
I have seen more owners actively engage with tenants in order to get direct feedback on needs and wants. In many instances, it can be beneficial to have the ownership express their appreciation for a positive working relationship with tenants.
Sultenfuss: In my opinion, the main thing landlords should focus on is making their buildings better than what employees have at home. There are a number of ways to achieve this, but I noted a few below.
- Investment in Technology: Smart office building owners recognize the increasing importance of technology in office spaces. They may invest in smart building systems, enhanced connectivity, and other tech solutions to attract occupiers.
- Adaptability and Mixed-Use: While some office buildings are basically obsolete and not easily converted to other uses, there are some scenarios where a building is able to be renovated. Some owners may consider repurposing office spaces for mixed-use developments, incorporating retail, residential, or entertainment components to make their buildings more attractive.
- Emphasizing Amenities: Savvy landlords have already started to focus on providing attractive amenities within their office buildings, such as wellness facilities, collaborative spaces, and on-site services like childcare to enhance the overall tenant experience.
Q: How are you advising office sellers and buyers to proceed?
Jones: Each case is different, and so the advice will vary.
- If they invest in value-add opportunities, then it may be time to sell a stable asset to free up capital for the expected value-add opportunities that could come along.
- If they are in a good position with their current debt situation, it may be worth holding until the lending market is more stable. The timing for this is the big question and gamble.
- If they have near-term issues with their debt, it may be best to consider lower pricing and moving on to a better option that fits with their current investment levels.
- If they buy stabilized properties and they are not in an exchange, it may be best to invest in short-term investments and keep their options open for a long-term commercial real estate investment that is priced well.
- If they are value-add buyers, it is a good time to look out for options coming to the market.
- 1,031 buyers need to weigh the option of paying the capital gain and re-investing at potentially lower returns than they would hope to achieve. This all varies with each situation and has to be evaluated on a case-by-case basis.
Q: What type of guidance are SIORs providing to occupiers with regard to what may be fluid requirements for space?
Lockwood: In the evolution of office space, SIORs should be counseling occupiers (in collaboration with architects) to design spaces which emphasize the culture of a company, while also appealing to a new generation of workers. Young professionals need to be enticed and motivated to be in the office, so the look and feel is incredibly important for the success or sustainability of a company.
No decision has to be permanent and maintaining flexibility with space use should be top of mind. The pendulum will likely swing back to a more traditional use over time.
Sultenfuss: We are an exclusive tenant rep and corporate service company, so we have these conversations daily. We have seen some really good return-to-office programs and we have also seen some really bad ones. The main thing we are seeing work to make the space better than what they have at home and try to make it more attractive for employees to work in the office instead of at home. A few key areas we have seen our clients focus on are listed below.
- Hybrid Work Models: Many occupiers are embracing hybrid work models, allowing employees to work remotely part of the time. This reduces the immediate need for large office spaces and encourages flexible or shared workspace solutions.
- Focus on Employee Well-being: Occupiers are increasingly concerned about employee well-being and creating healthier work environments. They may prioritize offices with ample natural light, green spaces, and amenities that promote well-being and work-life balance.
- Collaboration and Innovation Spaces: Occupiers often seek office spaces that facilitate collaboration and foster innovation. They may require more meeting rooms, creative spaces, and technology infrastructure to support team collaboration and idea sharing.
- Flexibility and Scalability: Occupiers are looking for flexibility and scalability in office spaces. They may prefer shorter lease terms, the ability to scale up or down easily, and spaces that can adapt to evolving needs and technologies.
Q: How are SIORs guiding owners and occupiers with regard to establishing the hybrid remote/office model that many employees appear to favor?
Lockwood: There is no one-size-fits-all for the hybrid remote/office model. Companies are all different, so the model needs to fit the culture of the company. SIOR brokers don’t just lease space; they are advisors as to the process of determining how the space fits into the culture of a company.
Sultenfuss: SIORs play a crucial role in guiding both owners and occupiers in establishing the hybrid remote/office model that many employees favor. Here are some examples of ways they provide guidance:
- Understanding Employee Preferences: SIORs help owners and occupiers understand their employees' preferences and expectations regarding hybrid work. We can help figure this out by conducting surveys, analyzing data, and gathering feedback to assess the level of interest in remote work, desired office amenities, and collaboration needs.
- Workplace Strategy Development: We assist owners and occupiers in developing a comprehensive workplace strategy that aligns with the hybrid model. We help them to analyze space utilization, assess current and future needs, and recommend appropriate office layouts and configurations to optimize productivity and collaboration.
- Flexible Workspace Solutions: SIORs help owners and occupiers identify and implement flexible workspace solutions that cater to the hybrid model. This may involve considering shared office spaces, co-working arrangements, or flexible lease terms that accommodate varying office space requirements.
- Technology Integration: We advise a lot on integrating technology solutions that support remote work and enhance the office experience. Like, recommend tools for seamless communication, virtual collaboration, and data security to ensure employees can effectively work from both remote and office locations.
- Workplace Design and Amenities: SIORs assist owners and occupiers in creating office spaces that are attractive and conducive to collaboration and well-being. We can provide recommendations on office design, amenities, and features that enhance the employee experience, such as flexible meeting spaces, wellness areas, and ergonomic workstations.
- Change Management: Just figuring out the right layout or amount of space is just the beginning. Once that’s figured out, we then help occupiers navigate the organizational and cultural shifts associated with implementing a hybrid remote/office model. We can provide change management strategies, communication plans, and employee engagement programs to ensure a smooth transition and acceptance of the new work model.
- Lease and Contract Negotiation: Real estate advisors assist both owners and occupiers in negotiating lease terms and contracts that align with the hybrid model. They may negotiate flexible lease terms, discuss remote work policies, and address issues related to space utilization, scalability, and shared spaces.
- Monitoring and Adaptation: We then have to continually monitor market trends, employee feedback, and evolving work practices to ensure that owners and occupiers can adapt their strategies accordingly. We provide ongoing support and recommendations to optimize the hybrid remote/office model based on changing needs.
By leveraging our expertise and industry knowledge, SIORs help owners and occupiers navigate the complexities of establishing a hybrid remote/office model that aligns with employee preferences and maximizes productivity and flexibility.
Q: Finally, with the office sector having a pivotal moment, what is your view of what future office use will look like?
Lockwood: I don’t see radical shifts in the office of the future. What we do see is that for office buildings to be appealing, they must have significantly higher-quality amenities within the building and within the immediate vicinity of the building. Occupiers want to see restaurants, bars, meeting places, fitness options and other amenities within proximity of their office. Thus, in today’s environment, walkable amenities and quality of space will win. I believe the appeal for this type of space leads to a period of new construction in the future as economics improve and as occupiers indicate they are willing to pay higher rates for this type of space because of the benefits they receive in hiring and retaining quality talent.
Additionally, many office buildings have become obsolete and are better suited as conversions or even demolition.
Sultenfuss: I think we are in the 3rd inning of what the long-term future of the office space will look like. I believe there is a reason everyone used to go into an office, and humans are social creatures that need interaction and collaboration to be successful. So, while it may take some time, I do think the office utilization rates will increase over the next five to ten years.
Jones: I think the hybrid work model will vary from market to market. I believe Tier 1 markets will be impacted at a higher rate than Tier 2 and below. The commute times within a market will influence this outcome. I personally believe that in any business where the sharing of knowledge and information is needed, employees need to come to the office. Younger up and coming employees will be negatively impacted by not being in the office to learn from the senior more seasoned employees. We see both happening in today’s market – companies pulling out of the offices and companies asking their employees to return to the office. There is no doubt that some level of remote work will be more acceptable in the future, and it will most likely depend on the type of work done in that location.