Valley could be heading for post-pandemic office glut - SanTan Sun News SanTan Sun News

Valley could be heading for post-pandemic office glut

June 25th, 2021 development
Valley could be heading for post-pandemic office glut

Executive Editor

As the pandemic appears to be giving way to a semblance of normality, the world of commercial office space is anything but normal.

Just ask Jay S. Kramer, an experienced real estate and finance attorney.

As Fennemore’s commercial transactions section director, Kramer has counseled numerous commercial and industrial developers, national and local homebuilders, planned community developers as well as financial institutions.

These days, as companies recall workers from their home offices or look at what post-pandemic work sites might look like, Kramer sees many employers asking themselves, “What now?”

Owners of big office complexes also are wondering the same thing.

“What now?” is only the beginning of a cascade of questions reflecting the uncertainty of post-pandemic office life.

“I think we’re all kind of focused on the same type of issues,” Kramer said:

“How do you return to the office? Are we ever going to have 100 percent work from home? 100 percent at the office? Or some type of a hybrid approach. How do we retain and recruit employees in either a hybrid or work-from-home environment? How do we develop a sense of community, camaraderie or whatever kind of firm togetherness?

“Those are the kind of large issues that everybody is grappling with,” he said.

The pandemic brought a new sensibility to office workers that can’t be undone with a simple directive, Kramer suggested.

Thanks to the virtual office environment, qualified employees often have more options since they can seek jobs at companies hundreds of miles away without ever thinking of moving.

Kramer sees no one-size-fits-all answer to the myriad of issues that the pandemic has raised for employers who inhabit large swaths of office space in many parts of the Valley – and the country.

For some employers, he said, the questions include: “How do you make offices places where people want to come?” and “How do we make the office more enticing?”

Others are grappling with how they can provide a comfortable environment for workers who want to alternate work time between home and office.

“One thing that we’ve been talking about for a long time is hoteling, where you have offices that you reserve,” Kramer explained.

“But I think a lot of people feel their office is almost like a second home. They want to make it more personal. They’ve got papers all over the place and pictures of their family and what-have-you.

“So the idea that every day you’ve got to pack up your stuff and either take it home with you or put it into a locker …that’s kind of disruptive.”

Kramer said the fact that many employers discovered employees often are more productive working at home complicates the issue.

Some workers might actually yearn to shed the sweat pants and head into an office at least a few days a week.

“It’s really the younger people who crave having that office experience, where they can be mentored and trained and have those interactions,” he explained, “while lot of the older people who already have their connections and relationships may never come back to the office.”

To some degree, employers may find themselves caught between a rock and a harder place.

On the one hand, some employers may find it beneficial for team spirit to have all their workers in one place.

Yet, team spirit may have to defer to other considerations, Kramer said.

“You spend a lot of money training them and getting them familiar with your systems and so you’ve got to retain them. It seems to be just extremely difficult to do and not just because it is an employee market,” Kramer said.

“It’s a challenge and it’s going to be a challenge for quite some time,” he said.

Kramer also said many employers that carried empty office space on their books realized some benefits of a home-based workforce at least for a while since they could cut as much as 20 percent of other expenses, obtained increased productivity form workers and wound up with higher profits as a result.

“I think short term is going to be a positive to the bottom line,” he said, noting that office expenses for supplies, food and even taking clients to lunch declined dramatically during the pandemic.

But to lure employees back, Kramer said, employers and landlords may have some unexpected costs – like major remodeling.

“I think everybody’s looking for flexibility. One of the issues with flexibility is what a company is to do about office space,” he said. “Do you assume that you’re going to have 50 percent occupancy from where you are today?

“And then there’s one school of thought that even though they’re going to let people in the office, the type of space that they have might have to be different.

“Instead of people being in cubicles or in small offices, they’re going to want a lot more open spaces, more immersive – what I call Zoom rooms.”

Landlords also may face some tough bargaining positions from their office tenants over “the typical legal issues in terms of lease negotiations,” Kramer said, noting employers likely will seek to cut lease expenses for parking and maintenance if they have fewer employees on site.

“We spend a ton of money on parking but when there’s no reason to have a parking space for every employee, maybe you ask to take 50 percent or 40 percent of your spaces and save a lot of money,” he said.

Overall, Kramer said, “companies are not going to want to give back some of those savings they saw in the pandemic.”

What all this means for the Valley’s pre-pandemic office building boom depends somewhat on geography and the tenant, Kramer said, though he predicted, “There’s going to be a glut over some period of time.”

While more companies move to the Valley and those that are already here continue to grow, that will hopefully reduce the inventory of available office space, he said.

But absent the large employers like State Farm and Nationwide that are moving hundreds and even thousands of employees into a large complex, Kramer said, “I think you’re going to see a lot of problem office development.”

“I think maybe real estate brokers and commercial real estate people want to tell you that everything is going to be rosy and what have you, but it just seems that short term, everything I’m seeing is – all the discussion is about – how much space do we really need?” he said.

“I don’t think there are going to be a lot of new projects that are going to start in the planning stage – ones that aren’t really saying they’re kind of ready to go. … We’re absolutely going to see a slowdown in office development.”

He said Gilbert and Chandler may see modest office development as Intel ramps up its $20 billion Ocotillo campus expansion.

“If you’re just looking at kind of speculative office construction for office workers – I don’t think you’re going to see much of that,” Kramer said.

“But now, Scottsdale’s a good market, Tempe is a good market.”

“I think the Camelback Corridor is still an area where people want to be, but even there, I think the rents are going to start dropping – the vacancy rates are going to go up there.”

The bottom line, Kramer said: “When their leases are up, companies are going to downsize space and so that means we’ll have a lot of space available.”

And downtown Phoenix, especially as a 4-year major overhaul of the Broadway Curve is looming in the near future?

“I don’t know if people still want to be downtown,” Kramer replied.