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Legal Notes: The changing landscape for leased commercial offices

John Bleasby
Legal Notes: The changing landscape for leased commercial offices

Business reaction to the COVID-19 pandemic suggests that allowing employees to work remotely and away from the office might unleash productivity and profit gains previously hidden in plain sight.

Employers have been supportive of the remote work concept for a number of reasons, not the least of which is the opportunity to slash overhead costs.

“In a post–COVID-19 world, the potential to reduce real-estate costs could be significant,” says McKinsey Global. “Rent, capital costs, facilities operations, maintenance, and management make real estate the largest cost category outside of compensation for many organizations…often amounting to 10 to 20 per cent of total personnel-driven expenditures.”

“Companies should take a fresh look at how much and where space is required and how it fosters desired outcomes for collaboration, productivity, culture and the work experience,” says McKinsey. “That kind of approach will also involve questioning where offices should be located. The coming transformation will use a portfolio of space solutions: owned space, standard leases, flexible leases, flex space, co-working space and remote work.”

One in five Canadians now working from home told pollster Angus Reid Institute that they will remain working remotely permanently. In fact, Canada’s leading banks and several government agencies have announced they will allow employees to continue to do so into 2021.

In the U.S., a Gallup poll revealed that the number of employed Americans working from home doubled to 62 per cent from March to April. Nearly two-thirds of those would prefer to continue remote work after health restrictions are lifted.

However, a June 2020 McKinsey Global survey suggests leading U.S. business executives expect nearly 90 per cent of their employees to return to the office by year end, with a very small percentage continuing to work remotely on a permanent basis.

This back-and-forth discussion over the future of remote work has left one real estate industry observer comparing the office space environment to walking in a blizzard, with little to guide the pathway forward.

There’s little doubt that the office still has a future — it’s simply going to be different. Although the long-term effects remain unknown, the nature of leased office space will change forever, no matter what percentage of remote work remains permanent. That prospect is already having an impact on both existing commercial buildings and those in the planning stages.

Developers and building owners are starting to recognize an increased demand for office plans offering more flexible, individual work spaces and fewer open office designs and collaborative meeting places.

They are starting to look at design consultancies like ROOM, a U.S. start-up formed to reshape the modern workspace with modular architectural solutions designed to meet the new demand for adaptability and flexibility in the office.

As companies evolve towards various remote and in-office work combinations using staggered shift times, individual workspaces must allow for safe distancing between workers and include mandatory cleaning protocols for any shared spaces. Even the logistical challenge of maintaining safe distancing while efficiently moving employees up and down elevators needs to be addressed via scheduling and technological solutions.

Owners and landlords must also accept that commercial leases are destined to change.

Jonathan Wasserstrum, CEO of New York-based commercial real estate technology company SquareFoot, says small and medium-sized tenants are now looking for flexible turnkey spaces on significantly shorter lease terms.

It’s a challenge for owners and landlords unfamiliar with what he calls “high velocity, short term leases,” versus five and 10-year leases that amortized tenant customization costs over several years.

Even the days of crown jewel tenants anchoring commercial office developments may be numbered. Less than 18 months after opening, legendary department store Nieman Marcus recently announced the closure of its 188,000 square foot outlet in New York City’s $25 billion Hudson Yards development. While conversion of this space to commercial offices is a viable option, the exact nature of that space will be determined by the new dynamics now influencing the real estate industry.

 

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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