The Shrinking Addressable Office Market

A COVID-19 Inspired Transformation

07/28/2020

 

Attempts to reopen the United States amid the COVID-19 pandemic have hit a wall…or should I say, the realities of living with a nasty virus. The crisis continues to wreak havoc, particularly among small businesses writ large and the retail industry. On July 23, Ascena Retail Group (the parent company of Anne Taylor and Loft) was added to the growing number of retailers that have declared bankruptcy. The pain of retailers and major mall owners, such as Simon Properties Group, is only part of the picture of the virus’ impact on the commercial real estate market.

 

Although many businesses will avoid or come out of bankruptcy, many others will not survive. Also, COVID-19 is forcing nearly all businesses to rapidly evolve to serve customers in a contactless, socially distanced, and remote world. This reality, on top of vacancies caused by business failures, will have long-term ramifications on the broader commercial real estate market. Therefore, companies who sell into office environments must now think long and hard about what the office market is going to look like in a post-pandemic world.

 

Factors that Will Shrink the Addressable Office Market

 

When we emerge from this pandemic, the square footage of office space in use will have shrunk. Multiple factors are driving this change. Some were gaining steam prior to the pandemic, such as the developments in cloud services, communications, and security technology that protects IT environments in an IoT world. COVID-19 dramatically accelerated the adoption of these technologies because they enable workers in a socially distanced world. A recent study by a partner of ours, Innovate MR, found that 92% of US workers follow socially distancing guidelines. This is not going to change until we have a vaccine and preventative drugs that are widely available. So, it is not surprising that nearly half the respondents in this study expect the number of people in their companies that will be working from home over the next 12 months will increase.

 

This is driving businesses to invest significantly to enable remote working and e-learning. Investment in business continuity and emergency response planning has increased, as well. Not surprisingly, many companies will be increasing their use of cloud-based software. Validation of this was heard in Microsoft’s earnings announcement on July 22, where management (speaking of data-center spending) signaled that the company will continue “to invest to meet that demand ahead of the curve.” Analysts at JP Morgan expect other cloud titans to do the same “driven by the work-from-home/online “everything”/business continuity surge” that drives traffic. So, it is not surprising that 68% of remote works agree that they have all the tools they need.

 

In short, two complementary currents will push many businesses to realize that they no longer need all the office space they occupied pre-pandemic. First, companies of all stripes are developing new modalities of working. And because this crisis will take time to be resolved, they will become increasingly efficient and comfortable in doing business in new ways. On the other hand, business leaders in a tough economic environment are making capital investments and engaging services to make all this happen.

 

How likely is it that all this innovation and investment will be pushed to the wayside once the pandemic is beaten? Not likely, I should think—particularly when many businesses will have a long road to walk as they recover, and they will want to maximize the ROI of their investments. Most businesses will return to their traditional office spaces; however, two things are certain. This pandemic will be beaten. Second, post-pandemic, many of us will still be working from home in T-shirts, shorts and flipflops, thinking back on occasion to the olden days when we got into a car and drove into an office.