Q3 Office Trend Update

by | 09 December 2020

Writing this spotlight piece feels akin to trying to do postgame football analysis of a fiercely competitive game right before the two-minute warning . . . of the first half. And even then, in football there are time limits and rules for overtime. Though we’ve learned a lot about the virus and its spread, for all we know we could still be minutes into the first quarter of our global fight against this virus.

The one thing we know for certain is that COVID-19 will continue to affect the market for years, though it remains to be seen how exactly this will all play out. For the moment, I’m going to give an overview of where we’re at and which intriguing trends are coming to the forefront as many workers continue to climb the walls of their home offices.

As of October 1, Minnesota had 100,200 confirmed cases of COVID-19. However, Q3 marks the first quarter that we’ve been able to reap the benefits of readily available testing and a mask mandate that has reduced the spread of the virus and allowed some companies to bring employees back to the office in shifts or rotations. Biotech companies are currently working on at-home rapid testing, which could further reduce the chance of outbreaks and boost economic recovery.

Economic Health and Its Effects on the Market

From a macro perspective, the stock market has been one of our biggest surprises. Many of Minnesota’s publicly traded companies have held up. UnitedHealth Group is having a growth year. According to the Star Tribune, Target and Best Buy are both expected to have growth years based on their fiscal-year revenue estimates. Cargill reported net income of $3 billion in its fiscal year through May, up 17% from the previous year and its fourth highest ever. These gains take into consideration the tariff impacts and COVID-19 effects locally and globally. In addition, companies that are being innovative and responsive with technology to implement their business units and products have been the winners, while many other companies struggle.

Regardless of how well companies may be doing financially, our workforce will be logging on remotely to some degree most likely into 2021. As a result, companies do not need to be reliant on local talent and thus can broaden their recruiting strategies to diversify their workforce. We predict that employees in areas of the country such as San Francisco and New York will consider employment options in the Twin Cities while looking to trade a higher wage for eventually living in a less dense urban area with a higher quality of life. However, this could also be a negative for Minnesota’s workforce retention. Ideally this would ultimately grow the Minnesota labor market and enlarge our talent pool. However, both national and local job growth is still somewhat sluggish following its plunge in April. As it stands now, the unemployment rate in Minnesota has risen to 7.4%, ranking 26th lowest in the nation, according to Minnesota Department of Employment and Economic Development.

To attract and retain tenants through the pandemic, landlords need to be flexible with their leasing strategies. More concessions such as free rent will be common through the next 12 months. Tenants and property owners must be also mindful of the more than 600,000 square feet of sublease space on the market as leases expire and tenants review their options, since sublease terms are typically more competitive than traditional market rents.

Space Planning for the Future

Space planning during and after the pandemic remains a hot topic of conversation in the office leasing world. Once a vaccine becomes readily available, we expect tenants to continue to prioritize health and safety both out of concern for their employees and to ensure steady productivity.

To this point, progressive technology companies have been working with designers to include virtual collaboration capabilities in new office space construction. As video chats become more commonplace due to remote workers and hub-and-spoke model offices, many tenants will be searching for spaces with Wired Certification or enhanced digital infrastructure, even as many agree that nothing will ever replace in-person interactions. The Wired Certification guidelines for commercial developments and redevelopments are created to ensure any new commercial real estate development or updated property is designed to meet the technology needs of today’s tenants.

Large-footprint offices that allow for in-person business interactions along with physical distancing are gaining popularity. At the same time, Rachelle Schoessler Lynn, Gensler’s director of workplace, is seeing workstations fluctuate from 1:1 ratio for workstation per employee to 1:2 or even upwards of 1:3, reducing companies’ office footprints as more employees work from home part- or full-time. Flexible workspace will be essential for tenants in the following years, and workstations will remain a part of fit plans. However, more collaborative space will be incorporated to ensure capacity for both large gatherings as well as intimate team meetings, and open-plan workstations will decrease in the following years to come. According to ULI, within five years it is expected 29% of companies will de-prioritize large-format corporate campuses and headquarters and open smaller satellite offices that are more easily accessible for workforces spread across large metro areas.

What’s on the Horizon

Looking to the future (or what we can see of it), leases on a significant amount of office space in the Minneapolis CBD will expire in 2021. It is expected the next year will begin the suburban sprawl with large offices maintaining a small downtown presence and opening offices in the suburbs surrounding downtown to allow for lower density as well as easier parking and commutes. Sever Construction, a contractor specializing in tenant buildouts, shared construction pricing is down by a small margin of 4–6% since the peak of 2019. The upside is that labor is readily available when tenants are ready to implement updated plans.

Companies are trying to learn what they need for future office space by future proofing their business objectives. They are carefully considering how working from home and employee productivity will impact tenants’ need for office space moving forward. While we do not know what the future will look like, what we do know is we have to stay open to the opportunity for change. We can’t wait until the day when we can provide true postgame analysis, but until then we’re here to help you figure out your game plan.