If you’re renting office space, you better have the cool factor. That’s the lesson from the pandemic-driven shift in work patterns and one we are finding success with here in Florida.
For decades, office tenancy and worker commutes settled into a predictable pattern. Companies appealed to their workforces by taking office space in the suburbs. The idea was that employees wanted to work close to their suburban homes. The trend was so prevalent there was even a book about the phenomenon – Edge City, a critique of suburban office parks published in 1992, described the rise of outlying business centers a comfortable distance from downtowns.
Sure, a few types of tenants – law firms and banks, mainly – kept offices downtown. But employers and employees were generally happy to do their work from midrise buildings in the ‘burbs.
But in the real estate industry, the only constant is change, and the 2010s brought about a resurgence of urban centers. Downtowns seemed cool again, and suburbs lost their spot as the shiny new place to work. Rather than moving to a gated community by age 30, young workers were staying in the city longer, even starting families there. To a new generation, long commutes and houses on cul-de-sacs seemed boring.
Then came the Covid pandemic, and the bottom fell out of the office market. For a time, work-from-home dominated. In those uncertain months before vaccines became widely available, everyone wondered if humans ever again would crowd into elevators or cram onto public transportation.
In a post-Covid era, it’s clear that people want to be around other people. But the office market has shifted again. In today’s work-from-home world, you’d better have a Class A building with great amenities. In Feldman Equities’ Florida office markets, we’re witnessing a dramatic flight from Class B and C office buildings. Tenants are leaving those spaces in droves and flocking to best-in-class buildings.
Part of what’s happening is that many employers are embracing a hybrid model. Workers come into the office just two or three days a week. This means employers can make do with slightly less space – perhaps a tenant will reduce their footprint by 10% to 20%. That then spurs an analysis of what type of space they really need, and perhaps justifies them jumping ship to a smaller space in an amenitized downtown. Even if the new space is more expensive on a price per square foot basis, tenants can keep their overall rent burden comparable by downsizing.
When tenants don’t want to reconfigure their existing space, they relocate. And when office users move, they’re choosing the most attractive and modern buildings — and abandoning the B and C product. In Feldman’s market in Tampa, the most desirable buildings command the highest rents and the highest occupancies. On the other hand, the least amenitized buildings are lagging. These are lower-quality B and C buildings and the buildings that are outside of the downtowns. In either case, the cool factor is completely lacking. The Edge City campus – dominated by parking lots, located in a remote location far from downtown, lacking modern amenities – is really hurting.
Source: Avison Young Q4 2022 office market report
The office trends in Tampa tell the story. In the region’s two central business districts, office vacancy in the fourth quarter of 2022 was just 11.4%, compared to 20.3% for the region’s many suburban submarket, according to data from Avison Young.
Rental rates showed a premium for downtown space. In the CBDs, average asking rent was $36.67 per square foot, compared to $29.21 in Tampa Bay’s suburban areas, Avison Young reports.
Source: Avison Young Q4 2022 office market report
In West Palm Beach, the trend is different in some ways. Suburban office space had a vacancy rate of just 10.4%, compared to 12.5% in Downtown West Palm Beach in the final three months of 2022. But downtown rental rates are significantly higher — $64.86 per square foot in the urban core, compared to $41.32 in the suburban markets, Avison Young reports. Downtown has also seen new construction whereas the suburbs have not.
Source: Avison Young Q4 2022 office market report
The Miami market has its own quirks. CBD space had a higher vacancy rate than suburban space in Q4, at 17.8% vs. 13.7%, Avison Young reports. But downtown office space fetches much higher rents, at $72.12 compared to $52.76.
Underscoring the trend is the success of new office towers such as 830 Brickell, a Class A building in Miami’s Brickell CBD. That property is finding plenty of tenants despite rental rates that broke the barrier of $100 per square foot and now are touching $120 a foot. By contrast, Ryder System, a Fortune 500 company, in 2022 put its headquarters in suburban Miami up for sale. Workers preferred their home offices to a workplace in the suburbs, the company said.
How to make an office building cool
Certain cool-factor amenities are difficult to find anywhere but in brand-new product. A prime example is the balcony on every floor. That’s very rare to find in an office building, but it’s part of the cool factor that sets hot properties apart. In the aftermath of Covid, tenants and workers want outdoor spaces as well as indoor spaces. If it’s a beautiful day — 78 degrees and bright sunshine – a worker can just grab a laptop and enjoy the weather outside.
Another must is a game area, complete with shuffleboard, ping pong tables, cornhole boards, even bocce ball courts. The gaming areas are part indoors, part outdoors. We’re even installing a golf simulator in one of our buildings.
The idea is to give workers a chance to mingle – and a reason to get excited about coming into the office. In another move in that direction, we’re also creating cocktail party zones with bars and beer on tap. The office building of the future will look and feel a lot more like a high-end hotel.
Of course, office buildings haven’t been designed like that in the past. So from a development standpoint, it really helps to have a clean slate. If you’re building from scratch, it’s far easier to design things like balconies and indoor-outdoor fun zones.
Even if a building isn’t being built from the ground up, retrofitting can freshen up the interiors and exteriors and make the building look cool. For instance, to liven up an older building, an owner can install space-aged ductwork that seems pre-designed.
Here at Feldman Equities, we have a history of staying ahead of the curve and today is no different. While we look to add amenities to our existing buildings to drive occupancy and rents, we are also on the lookout for opportunities where we can build from the ground up to deliver the next generation of office space the market is clearly looking for.