The pandemic’s effects on the workplace can offer lessons for the future
Jeff Engelstad
We’re all too familiar with hearing about businesses closing, offices shuttering and workers setting up at home as a result of the COVID-19 pandemic. But now that the commercial real estate industry has lived in this reality for more than a year, we can examine how the pandemic affected ongoing trends—and what that means for the industry moving forward.
Jeff Engelstad, a professor of the practice with Franklin L. Burns School of Real Estate and Construction Management at the Daniels College of Business, says that while COVID-19 has certainly presented new challenges to the commercial real estate industry, many of these changes began long ago, and the lessons we’ve learned throughout the experience can provide a glimpse into the future.
The working-from-home shift is a prime example. Engelstad says many organizations were already testing the waters of remote work as far back as the early 2000s, when suburban offices were thriving and fast internet connections were becoming more reliable. But COVID-19 caused it to happen rapidly and on a grand scale, whether these organizations were prepared for it or not.
“We were all forced into a grand experiment of working from home, and we survived and thrived,” Englestad said.
The general success of the work-from-home trial run will create a major change in workplace culture moving forward, Engelstad says. He predicts that even more companies will convert to a model where employees may work from the office for a few days a week, mixed with a few days of working from home.
“We’re not just going to flip the switch and we all go back,” Engelstad said. “Offices are going to have a very long-term structural change.”
That leaves the question: What can offices do with all of their unused space moving forward?
“There will still always been a need for offices and their presence, but we might just not need as much of it,” Englestad said. “It can be and has been converted into residential space, or it can be converted into a production facility, in some way.”
Englestad also says that single-story offices, rather than skyscrapers, could see a resurgence in popularity. Social distancing and a heightened awareness of sanitation will likely be lasting habits for many, so the perks of these spaces—convenient parking, no sharing crowded elevators—are becoming more appealing.
In addition to offices, retail has been another hard-hit sector of the commercial real estate industry during the pandemic. Online retailers like Amazon have been hastening the closures of big box stores for years, but with reduced capacity limits and the encouragement to stay home as much as possible, the pandemic has kicked that trend into an even higher gear.
“Retail has certainly changed in recent years, but had it been slowly, and now it’s much quicker,” Engelstad said. “Why go to the store when they have a website? Now we’re left with this box and everyone is getting stuff delivered to their door.”
Rather than let those shuttered spaces wither away, they can be repurposed to fit the changing needs of the industry.
“Delivery times are becoming almost instantaneous and in order for that to happen, the last-mile logistics people need to be there,” Engelstad said. “The infrastructure already exists, because that box is there, so investors are asking, ‘Can I go out in advance of Amazon and gobble up big boxes for next to nothing, hoping to turn them into fulfillment centers?’”
Ultimately, these questions point to how adaptability has become a key element for commercial real estate’s success in a post-COVID world.
“Any situation creates winners and losers,” Engelstad said. “There’s always someone who is going to figure it out. In the commercial real estate market, everyone is looking at next opportunity.”
The road forward for the commercial real estate industry should be guided by true demographics both Micro & macro provided by true demographers with real skills in demography, multivariate statistics & forecasting/ feasibility. Additionally it would be wise to hire professionals( including attorneys, politically experienced consultants & planners) when attempting new zoning be it for adaptive use or Ned development.
I am joining DU as an executive Ph.D. candidate in fall 2021, in Accounting and Finance. I am the President of transitional Capital Management, a boutique private investment firm, focused on investing in long-lived assets with contractual or highly predictable recurring cash flows. We have recently established an effort focussed on Facilities Infrastructure Managed Services, with an emphasis on Environmental, Health & Safety (EHS or Environmental, Health & Wellness – EHW).
We began the effort in response to dynamics we observed in the commercial real estate sector as well as in education and healthcare. We have noticed requirements for substantial upgrades in the physical plant infrastructure of facilities: HVAC Water & Wastewater Treatment, Energy, Parking, and Telecom.
Our clients include school districts, universities, and large commercial building owners and developers. There are significant changes to density and occupancy and “use case” considerations taking place. In the commercial office area, we have observed that about 50% of existing tenants are changing their use case and occupancy protocols and occupancy rules, while another 25% are making no material change and the other 25% appear to be pausing before deciding which direction they are heading.
The most common changes contemplated among tenants include some density considerations, tenant personnel health & wellness screening, and monitoring protocols. Some tenants are suggesting a modified workweek to implement density planning and reconfigurations.
We have noticed some concerns around the quality of air and the physical environment in tenant spaces and the ability of buildings and tenants to monitor and report on and manage their environments. Tenants are appearing to be interested in tools to m monitor and manage and report on the space environments to their staff. While OSHA typically makes unenforced recommendations regarding workplace environments, they seem to be trending more strongly into providing more than “guidance” and are implying standards and expectations, which may be required to be followed.
I would be interested to learn if others have witnessed similar or different tenant/occupant and building owner trends.
Initially, we were concerned about WFO becoming permanent and resulting in huge dislocation of building space, occupancy, and values. While we remain concerned about value implications related to tenant sentiment of EHS / EHW within building spaces, we have not seen major building owners begin taking cautionary measures or changes to their management of environments as a means to protect values (at least not announced publicly).
We believe concerns regarding occupancy in high-rise buildings related to EHW and density and elevator use protocols, etc., to be justified but have not yet seen any owner shifts. We concur with the notion of preferring low-rise space and buildings with more open-air access.
There has yet to be demonstrated sentiment regarding occupancy and density related to EHW, yet we believe as people begin returning to work, we will also begin to observe tenants establishing expectations around EHS/EHW.
I would appreciate hearing others’ views and thoughts on this area.
Here in the Philippines, commercial real estate rentals and sales plummeted due to the government’s restrictions in the name of covid. Since the virus will never be going away, I have to wonder if commercial real estate will ever be as valuable as it once was.