The Changing Need for Office Space

The pandemic has triggered plenty of speculation about the future of office space, including the possibility that a long-term shift to remote work for some employees, for at least part of the time, could shrink the need for office space increasing vacancies and pulling down rents.

Even as increasingly optimistic news about vaccines improves the possibility that many office workers could resume their old commutes by the mid-year, it is not clear if the Twin Cities office market is on that path.

Until leasing activity picks up, brokers say there’s little data on which to form a prediction. There are reports that the number of new leases signed in the second half of 2020 were down 42% compared to the same period a year earlier. However, many suburban office buildings have seen increases in occupancy.

Many Twin Cities commercial real estate professionals don’t see prices completely cratering – in fact, quite the opposite in some buildings. Modern buildings that can more easily adapt to the post-pandemic work environment with flexible work areas and more breathing room for employees, may possibly be even more appealing to tenants. Older buildings that do not offer those options might see prices and occupancy suffer. There are also discussions about the differences in “Urban vs. Suburban” – with many suburban office buildings seeing renewed interest from those businesses looking to move out of urban areas.

Vacancy rates have ticked up during the pandemic. A Cushman & Wakefield fourth quarter report estimated the vacancy rate at 19.9% for the Minneapolis-St. Paul market, an increase of about 2 percentage points from fourth quarter 2019. That gives tenants an advantage in lease negotiations and landlords could offer significant incentives, such as up to a full year of free rent to get a signed lease.

But while there is still uncertainty in the market, in many cases the deals that have been done in the last year or so have looked a lot like the deals that were done before March 2020. Another reason for optimism is that since mid-February 2021, the number of showings per week for some office brokers when compared to number for the same week in 2020 was about the same, which has not happened since the start of the pandemic.

Renewed leasing activity could lift some of the fog that’s settled on the Twin Cities office market. But it will not erase all the hesitation that has been created over the last 12-15 months. The challenge tenants are having right now is that they cannot form a clear picture of their space needs. If they do not know how many employees are returning to the workplace, or whether those employees might still spend a few days of each week at home, then they do not know what their space needs look like and are still formulating their post-pandemic office plans.

Some larger corporations have started the process of allowing employees to find their own offices outside the home and they will be credited the cost of an office through a pay increase or stipend. The number of companies that will continue with that trend is not clear, but the leasing of smaller suburban office space has certainly picked up by the trend.

But does this mean post-pandemic office spaces will shrink? Not necessarily. Employees that spend just two or three days per week in the office could share flexible workspaces with coworkers, a trend that would drive space needs down. But if those same employees demand more personal space in the post-pandemic environment the two trends may work to offset each other. Most agree though that the trend will be toward smaller office workplaces in a post-pandemic market.

The bottom line is that these decisions are looming, and large employers that tentatively set return-to-work dates for summer or Labor Day are largely sticking to those plans. Workplaces could be back at around 90% capacity by year end 2021.

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