Death of the HQ? Pandemic hits commercial real estate, but long-term trends still open to debate

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A rendering of one of Amazon’s new buildings in Bellevue, Wash. (Vulcan Image)

“HQ’s are finished.”

That was the hot take this week from Chris Herd, founder and CEO of remote work setup startup Firstbase. After speaking with about 1,000 companies over the past six months, he estimates that many will be cutting their office space by as much as 40% to 60%. About 90% of workforces indicated that they “never want to be in an office again full-time,” he wrote.

The latest example of the trend is the news this morning that working from home will be a permanent part of the mix at Microsoft. Boosting access to talent, reducing costs, and quality of life were among the benefits of remote work cited by companies in Herd’s informal survey.

“Good thread on the future of work. I agree with him,” former Zillow Group CEO Spencer Rascoff chimed in.

Why this Seattle-area startup ditched its physical office — and what it means for the future of work

Of course, Herd has a vested interest in the future of remote work, and his sample looks to be more anecdotal than scientific. And others aren’t convinced that physical offices are dead. Commercial real estate firms, which have their own inherent biases on the topic, remain bullish about employees eventually returning to the office despite increasing vacancy rates over the past quarter.

“It will take some time to return to our pre-COVID-19 levels but we are confident of our recovery,” real estate company Broderick Group said in its Q3 report for the Seattle region. “Bet on cities. Bet on Seattle.”

So what do the numbers say? Two new statistics provide a sense for the trends.

  • Office building vacancy is up across the Seattle region amid the shift to remote work due to COVID-19. Vacancy rose from 6.2% to 6.9% during the third quarter in the Seattle area, according to a new report from Kidder Mathews. (Vacancy rates reflect active leases. Even if a space isn’t fully occupied right now due to remote work, it’s not considered vacant if a lease is in place.)
  • The region also experienced negative net regional absorption — commercial real estate lingo for a period in which the amount of space vacated in the market exceeds the total amount leased — for the first time since the fourth quarter of 2017.
  • Sublet vacancy jumped to 18% of total vacancy from 13% last quarter.

The big question now is whether those changes are a temporary blip, or the beginning of a lasting trend.

“While sales activity will be slow to recover and the fundamentals of the regional office market are expected to be volatile, the region appears to be positioned to ride out the storm, but time will tell,” Kidder Mathews said in its report.

JLL’s Blair Stern. (JLL Photo)

Blair Stern, a senior vice president for JLL in Seattle, said he’s not seeing many clients commit to remote work long term. He said companies are struggling with productivity and employee well-being with the new WFH lifestyle.

Recent research from Microsoft confirms that remote work is leading to more stress and mental fatigue. There is a thirst for in-person interaction that leads to collaboration, camaraderie, and culture, Stern said.

But it may be some time until the commercial real estate market returns to pre-pandemic levels, if at all.

“The key is making a safe work environment and resolving the interim childcare crisis with homeschooling,” Stern noted. “Once we can solve those two items we expect to see a strong push back to the office and high demand.”

Broderick Group said it is seeing 20 to 25% of employees spending time in the office now, compared to 5% to 10% during Q2.

(Via Broderick Group Q3 report)

As GeekWire previously reported, some startups are ditching their physical space altogether as companies weigh the benefits of keeping an office against potential cost savings amid the ongoing economic and health crisis.

Facebook buys REI’s new HQ for $367M, expanding Seattle-area footprint beyond 3M square feet

Seattle-area outdoor retailer REI made the surprising decision to sell its brand new Bellevue, Wash., headquarters complex in August. It will move to a less centralized headquarters approach that spans multiple locations across the Seattle region.

But in a potential sign for the long-term viability of physical offices, Facebook — which is allowing employees to work from home until July 2021 — swooped in and paid $367.6 million to purchase the 6-acre, 400,000 square-foot complex from REI.

Broderick Group noted that COVID-19 “has yet trip up demand from the tech giants,” citing Facebook’s purchase and Amazon’s new leases for two million square feet of office space in downtown Bellevue.

It also reported that “there are several tenants considering adding space available for sublease, which should lead to a growing available space market for the next couple of quarters.”

Subleasing could help some startups afford nicer office space that was previously too expensive or not available in a low-inventory real estate market, KUOW reported.

It’s unclear if companies will get rid of physical offices altogether, but the office itself will likely look different. Starbucks, which is letting employees work remotely until next October, is remodeling its HQ to allow for more flexible work space.

Microsoft is moving to a “hybrid workplace” model that lets employees work more from home, with the option to use shared space at the company’s physical offices if necessary.

The hybrid strategy that mixes remote work with an actual office may be where many companies end up. That could benefit co-working operators which are trying to survive during a pandemic that forced spaces to close.

The Riveter CEO Amy Nelson and her four kids. The Riveter had to shut down its co-working spaces and is now focusing on helping working parents. (Photo courtesy of Amy Nelson)

The Riveter shut down all nine of its locations and slashed more than half of its staff this year. CEO Amy Nelson said the Seattle-based company is trying to grow its digital community with a new focus on working parents.

Nelson isn’t sure if The Riveter will ever go back to renting shareable office space, but she’s still confident in the future of co-working.

“Co-working will boom,” she said. “It provides people with an alternative to the traditional office and an alternative to home.”

Seattle has been known in recent years as the “crane capital” given the constant new buildings going up. Broderick Group said there are 18 commercial office projects under construction in the Seattle region, with 60% pre-leased.

“The effect of the COVID-19 lockdowns and the resulting economic recession slowed the entire industry, pushing back some timelines for completion,” it noted. “Developments yet to put a shovel in the ground will likely proceed only if they receive a significant pre-lease.”

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