Commercial leases, unlike residential leases which are generally standardized, come in many different forms.
As employees return to the office they left behind, they may find new floor plan designs, safety features, and amenities welcoming them back to the office.
We’ll begin this article by looking at the big picture of office space in 2021.
CBRE Research recently completed The Future of the Office survey to learn how sentiment around the future of office has changed. The study was completed by senior-level real estate executives to gain insights on how sentiment is shifting about location, design, and use of office space.
The Report reveals four key macro trends office building owners and operators should expect in 2021:
These four key trends may pose challenges for some office landlords in 2021. Experienced office landlords who proactively anticipate and provide the most in-demand building attributes and tenant desires will likely see properties outperform this year and beyond.
These are the six most sought-after attributes in the future ranked by survey responses, according to CBRE:
The reason for having an office is also evolving to meet new tenant needs. Offices used to be the place for managers to oversee employees in one place during normal business hours.
Today, only about 6% of the real estate executives view office space as providing a place for overseeing workers. Instead, organizations see the role of the office as important because it:
Office landlords are bracing for a “new normal” in workspace demand.
As S&P Global reports, employees re-entering the office of 2021 may see altogether different layouts and new safety features. People will be working with greater distances between them, and open floor plans may be divided up where more personal space is needed.
The new look of office space in 2021 will be customized, with some design hinging on government guidelines and requirements, along with the needs of each individual tenant. Commercial real estate firm JLL recently took an in-depth look at how office workspace needs will change.
According to the report, there are several key factors for landlords and tenants to consider when designing office space for optimal safety and productivity.
Over the last two decades, creative office workplace designs allowed businesses to put more people into less space. It also allowed tenants to save on rent by shrinking their overall footprint. Twenty years ago, about 325 square feet was typically allocated to each employee. Up until last year, office densities ranged from 75 to 150 square feet per person.
Post-Covid, the generally accepted norm of adequate office space is likely to change. Employees will be concerned about returning to the office, and worried about the close proximity of coworkers and cleaning procedures.
For many tenants, implementing social distancing floor plans in the office will mean increasing the average square footage per employee by nearly 50%. Office users should consider the following factors when calculating the number of individual workspaces and total square footage needed in today’s work environment:
Other questions office users should consider include whether shared areas such as kitchens can accommodate social distancing, potential ‘bottlenecks’ such as lobbies and bathrooms, and whether a rotating in-office schedule or phased approach to re-entering the office works best for a particular business.
Prior to Covid, the majority of employees never worked from home. As people come back to the office, permanent redesign of office space should offer greater privacy, hygiene, and employee comfort.
Office floor plans with large amounts of open workspace may not need to be completely redesigned. For example, workspace arrangements such as benching, hoteling stations, pods and soundproof booths could offer a greater allocation of space per employee.
Semi-private work areas like these also allow employees to escape from the rest of the office with personal space that provides hygienic benefits.
As tenant office spaces move to de-densified desk layouts, more offices and workspaces along with more side rooms for small meetings can offer the safety and security that employees want and need.
Businesses should not mandate who comes back to the office and when. Instead, choice should be on the individual level. Forcing employees to come back to the office before they are ready could lead to lower productivity or higher turnover. Landlords and employers are also awaiting liability protections from state governments.
Healthy office buildings will go from a ‘nice to have’ to a ‘must have’ in 2021. According to an article from Forbes, “Everyone who owns or operates a building has to seem themselves as being in the healthcare space.”
Office building owners and operators have an important impact on the health of tenants. The potential spread of infectious disease and prevention is forcing landlords and tenants to think about how to make office buildings healthy, and will be an enduring legacy of the virus in the commercial real estate industry.
Investing in capital improvements and upgrades to help office buildings stay healthy will help landlords sign more leases, grow market share, and increase cash flows.
Improved wellness features such as improved drinking water quality, moisture control, security, and HVAC improvements for killing airborne pathogens, molds, and even allergens will be useful well after Covid comes to an end.
Healthy office buildings also create a feeling of physical safety and psychological wellbeing in the office. However, there are also several critical risks landlords and businesses must consider that go beyond physical improvement to the office space.
According Forrester, a leading global market research company, risks that firms need to know to avoid and mitigate include:
What happens if a tenant becomes ill, or a visitor infects other building occupants while the Covid-19 crisis continues?
That’s a question that attentive office building landlords and owners are pondering today. Absent any federal or state action on the issue, commercial property owners need to be prepared for potential legal liability issues to protect the property, the tenants, and themselves.
An article from the NAIOP Commercial Real Estate Development Association offers these liability prevention tips for office building operators.
Landlords who demonstrate they are always acting in a “reasonable and prudent” manner can help protect themselves from potential liability issues before they arise. It’s important to keep communication channels open, even with tenants who are working from home.
Update tenants regularly on status of the building including hours and services, what the building’s janitorial decontamination services do and don’t do, and establish building access procedures for tenants, guests, and vendors.
Let the tenants know at all times that all government laws, rules, and regulations are being complied with. If local laws deem some businesses essential while others must shut down, landlords should work with legal counsel to determine which “essential services” are exempt.
Liability issues may arise despite a landlord’s best efforts. Having an Incident Report procedure in place for building management and maintenance to handle Covid-19 cases can help mitigate liability.
Written reports should include which tenant is reporting an issue and the people involved, when and where it occurred, what happened, and the steps the property owner took to address the issue.
It is too soon to know how courts are going to interpret Covid-related matters as casualty events within the language of the insurance policy. Many insurance policies may contain an exception that Covid-19 will fall under.
To protect themselves, landlords should contact their commercial general liability (CGL) carrier when an incident occurs even if a claim is not being made at the time. Information reported to the CGL carrier should include that there was an incident at the insured property, an Incident Report was submitted to the CGL, and what remedial steps were taken to mitigate the situation.
Office building owners should also ask their CGL carrier if there are any other reasonable steps to be taken. Asking for guidance prevents the carrier from having a coverage defense by claiming the landlord did not act properly in response to the event.
Amenities have always been an important part of the mix for office buildings, and office amenities are becoming even more important than ever in a work from home world.
Common areas that were closed during the pandemic will begin to be opened up again as tenants re-occupy their office space. In some cases, the landlord has a legal obligation to preserve access to amenities, because no one thought to include exceptions for a pandemic in office leases.
For other office building owners and operators, amenities help businesses be more competitive with employees who now have more options than ever for where and how to work, and even who to work for. Re-opening amenities helps to keep tenant turnover low and building occupancy high.
Highly-amenitized office buildings also command higher rents. As GlobeSt.com recently reported, office buildings with the best amenities generated rent premiums of 18% or more compared to neighboring buildings with fewer amenities.
Even if work from home and flexible in-office schedules continue after the pandemic ends, office building amenities will be more critical than ever. Differentiation through amenities will be more vital than ever for landlords and occupiers to meet and exceed worker’s increased expectations for an office experience that is better than ever.
Office landlords should expect spaces to have low day-to-day occupancy levels until a vaccine is fully rolled out and the pandemic is brought under control. Until that occurs, any density concerns office occupiers may have will be eased as employees who do not want to return to the office continue to work from home instead.
In the meantime, given the imminent rollout of a vaccine, tenants and office landlords may be less inclined toward making costly improvements that may be unnecessary if Covid can quickly be cured.
Most office space floor plans for existing tenants will not significantly change. That’s because physical configuration and tenant improvements only occur upon a renewal or extension of a lease so the landlord can justify the additional cost. The majority of office leases are for 5-10 years, and most did not expire during Covid.
Office building owners making strategic capital improvements to make office space safer and healthier will continue to attract more tenants, increase market share, maintain cash flow, and increase property values.
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Commercial leases, unlike residential leases which are generally standardized, come in many different forms.
It’s not uncommon for investors to think of large office buildings with dozens of tenants as being broadly diversified, risk mitigated investments. Like an apartment building, it is often assumed that by having a good mix of many tenants without overdependence on just a few, a building can be operated with relative impunity because if one tenant moves out, the impact will be minimal.
A boom market makes real estate investing look easy. Investors chasing fast yields flood the market, bidding properties up to the point where the yield isn’t there.