The 2020 Q2 office market may go down as one of the most challenging in recent history for the Minneapolis-St. Paul area. While the COVID-19 pandemic had begun to shake the market at the end of Q1, the civil unrest following protests and subsequent riots over the horrific death of George Floyd have created further uncertainty and added considerations for owner and users of office space within the city limits, especially in the Minneapolis CBD. Predicting what the future holds is simply a best guess scenario, but let’s break down some of the key drivers that will affect the future of office space in the Twin Cities.
Until a vaccine is widely available, it will not be business as usual for office users. Numerous surveys suggest that most workers would prefer to return to the workplace over working from home permanently; however, that may not be so easily accomplished when daycare is lacking and children may still be distance learning at the start of the next school year. Other workers may find that due to underlying conditions or close family members with underlying conditions, they do not feel safe returning to the workplace. For employers, the need to be flexible and provide a clean and safe workplace is paramount. This encompasses factors such as scheduling teams in shifts to allow for proper spacing, stringent cleaning protocols and for many, the incorporation of new technologies.
These new technologies run the gambit from contact tracing systems, which will log employee interactions within the workspace, to the use of UV rays for cleaning and the installation of new purification systems for HVAC. Thermal cameras that can detect fevers are being marketed as virus-containment products, and many employers are having employees install apps on to their phones for touchless office entry and elevator service. Some of these technologies can track and monitor employees regarding interaction, body temperature and health conditions, and many feel that the issue of privacy is at risk when it comes to employer access of personal data. Others feel this is not effective, as it does not account for asymptomatic carriers. And while technology might be able to provide an additional level of safety, it doesn’t replace requiring employees to follow social distancing measures.
From an economic standpoint, COVID-19 has already had a negative effect on corporate bottom lines. On top of having employees work from home, many businesses have had to reduce staffing through furloughs and layoffs. The new technology, increased cleaning and other safety measures have further cut into budgets, leading to several tenants considering taking smaller spaces than they had planned when renewing or signing a new lease. Conversely, some tenants who had utilized a denser workspace in the past are now considering increasing their square footage to provide more individual workspace and circulation space throughout the office. This increase in space will allow for the proper distancing to comply with COVID-19 pandemic guidelines and provide employees with a better feeling of safety at work.
In early Q2, we began to project that interest in suburban office space would see an uptick over the next few quarters due to public transit risks and social distancing considerations, as well as how long it would take employees working in skyscrapers to get into their offices due to limited elevator capacity. However, this could also potentially be a long-term shift for two reasons:
First, the social unrest and conversations around reducing or dismantling the Minneapolis Police Department have made many tenants in the Minneapolis CBD, especially national tenants headquartered outside of Minnesota, look at their downtown spaces in a new light.
Second, national reporting on Q1 2020 from Colliers indicated that investors are taking special interest in suburban office spaces throughout the U.S., investing more in suburban assets than CBD assets. To feed investor interest, we may see an uptick in suburban office construction or redevelopment.
One interesting related trend that we’re seeing nationally is companies that have returned to having a centrally based CBD office with one or more larger suburban offices. This model, known as the hub and spoke model, allows the company to rent less space in the CBD and to allow some employees to work closer to home—or at least not need to drive with traffic patterns into the CBD. We’re not seeing this in the Twin Cities yet, but companies in larger markets such as Dallas, Los Angeles, New York and Chicago have shifted back to this model after having consolidated their workforces in the CBD. Companies that want a Minneapolis CBD presence but that are also concerned about safety downtown may consider doing this in the quarters ahead.
The good news is that eventually, the economy will recover. It would take a crystal ball to see if this will be a V-shaped recovery (a sharp decline followed by a quick bounce back) or a U shaped recovery (a prolonged decline with a slow build back to the levels we saw in Q1 2020), but we know we have the key ingredients to return to a robust economy with strong corporate bottom lines, low unemployment rates and low interest rates. We also have reason to believe that while the office of the future will be more flexible and adaptive, the office market will rebound along with the economy, as, across the board, workers are excited for a chance to return to workplaces. Until then, we have an increased opportunity to practice empathy and innovation while helping our clients take on their crucial real estate decisions.