The return to the office is underway, and companies chasing talent are testing new markets with coworking space and subleases.
After planning and pausing amid the pandemic’s uncertainty, the return to the office is starting to take shape for more tech companies—mostly around the new hybrid workplace. But when it comes to selecting real estate, there’s one key factor driving everything: employees.
Thanks to the rise of remote work and the current labor shortage, employers are looking closely at where they can find talent, the underlying costs, and where people want to live before testing out satellite office locations—or the “spokes” in today’s hub and spoke model of work.
“Employees are in the driver seat,” says Beth Moore, head of strategic growth at Raise Commercial Real Estate. “People are taking a hard look at where they really want to live.”
Big Tech is leading the way.
After most companies planned to return to the office in September—pausing due to the spread of the delta variant of COVID-19—big tech is starting to make new commitments on office space. Google said it would spend $2.1 billion on a Manhattan office, one of the largest prices in recent years for a U.S. office building. Microsoft, Stripe, and Roku are also in talks about leasing space in New York City—20 months after COVID-19 first shut down the office real estate market and buildings emptied—setting record vacancy levels.
Amazon is building a $2.5 billion space in Northern Virginia. Apple paid $450 million for three buildings in Cupertino, California, not long after signing a lease for a 700,000-square-foot space in Sunnyvale. And more small and medium-sized businesses are starting to make short-term office commitments.
What kinds of spaces employers choose varies by region. In Los Angeles, leases for free-standing buildings with indoor and outdoor space are more popular, while in New York, companies tend to be drawn to quality and class A buildings with upgraded ventilation systems that are close to mass transit.
In San Francisco, longer term subleases—36 months or more— are being leveraged by startups looking to bank space for the future, according to Raise data. This comes amid a mass exodus in the market of large corporate headquarters. Slack, Square and Coinbase announced their businesses will be remote-first, and Salesforce, Yelp and Pinterest were among those that are shedding office space. More companies—74— moved their headquarters out of California this year than in all of 2020.
Leasing activity also appears to be percolating again in smaller markets, such as Pittsburgh and Grand Rapids, Michigan. The national office asking rents inched up 1.2% in September to $38.62 per square foot, according to CommercialEdge’s October national office report. While $50 billion worth of office space transactions closed in September, the vacancy rate across the top 50 markets has hovered steady at 14.9%.
“We’re seeing the velocity pick up,” says Moore. “Things have been pushed out or postponed and now they’re saying, ‘How do we execute?’”
One-size-fits-all won’t work.
There’s no one correct playbook companies are using for the return to office and identifying office locations in a hub-and-spoke model. While some companies press on the gas, others, such as Capital One, have evaluated their return-to-office plans and decided to push it back entirely until 2022, real estate broker Todd Doney of CBRE told the Los Angeles Times last week.
“We’re full steam ahead,” says Sinohe Terrero, CEO of Envoy, a San Francisco workplace technology startup that makes in-office software for space utilization, desk hoteling, and visitor management for such brands as Netflix and Uber. The company officially went back to the office last week—with a hybrid workforce and an understanding there will be some kinks and learning experiences Envoy’s team can share with clients.
With plans to more than double its workforce to 460 people within the next year, the company is aggressively hiring at its headquarters in San Francisco. Yet Terrero knows there is talent outside the city.
So the company did a deep study of other markets to understand the cost of living, the cost of labor, the quality of talent, education level and more. It picked Denver because the city is home to plenty of skilled enterprise and tech sales people—and it’s also an attractive market for people relocating. It also has employees in New York and London, but because those markets are far more expensive and with far more competition for talent, the company is instead giving workers access to a WeWork coworking facility. In addition, Envoy has a light “presence” in Kansas City, Kansas, and soon, Austin, with flex office space.
“The ability to hire has changed in specific locations, and underlying costs are moving rapidly,” says Terrero, who has handled facilities and operations in the past for Indiegogo, Esty and others. “That’s thrown a monkey wrench into everything, and we’re trying to figure out what is the new normal in these markets.”
True, today’s changing environment makes it nearly impossible to predict how things will look for an individual workplace three, five or 10 years out.
And as the pandemic wears on, employees’ desires are also in flux. Raise surveyed its clients’ employees about work preferences and witnessed how they changed in just the last 10 months. Workers who said earlier this year that they were interested in coming into the office two or three days a week now say they want to be in the office three to four days a week. Those who they preferred 100% remote now want to be in the office two to three days a week. “Distance makes the heart grow fonder,” Moore says.
Testing… testing…
Despite the change, it’s clear now that most employers are embracing hybrid workplaces at varying levels, and they’re moving away from the traditional centralized office.
The sweet spot for the hub-and-spoke model? Subleases, pre-built offices and coworking (flex) spaces. They allow companies to test offices in other markets with short-term commitments and no upfront capital.
Startups tend to be the biggest subletters of these spaces, which usually have one- to two years left on the lease terms. They get ample flexibility and opportunity to try on different locations, without being locked into a single location with a massive lease commitment. Offices ready to go with furniture and wiring are bonuses, because it means less time to get up and running.
Employers may not be in the power position for hiring, but they do have plenty of choices for office space these days. The availability of subleases are still at historical highs across the nation, with only 5% to 10% of subleased space reoccupied in major markets—with tech heavy markets such as Los Angeles, San Francisco, Manhattan, and Denver on the higher end of that range, according to Raise data.
Most coworking spaces offer employers “access passes,” which allow employees to go into any office nationwide within that coworking brand. It gives people more options about where to work, and it lets employers test which locations employees prefer and make long-term decisions based on that data.
Another tool to vet locations: “zip-code mapping” of employees’ home locations to determine whether to create “cluster offices”—or the “spoke” in the hub and spoke model. Employers are also taking a good look at cities in which they’ll find specific kinds of talent, most specifically tech talent.
There’s been a lot of activity in Miami, says Moore, since the city made a big tech push and has been wooing Silicon Valley companies with affordable housing, temperate weather, and more diverse workers. Average asking rents for office space in Miami grew the third-fastest in the nation, hitting $43.43 per square foot, up 5.8% compared to the same time last year, according to CommercialEdge.
Along with those market tests come new leadership roles within companies. Employers have realized the importance of place, says Moore, and they’re hiring leaders who can manage culture and connectivity among remote workers and design “experiences” around the office, whether it’s looking to employees to find out what’s meaningful in an office, setting specific days for in-person collaborative sessions or organizing company events that provide value in the office. Last year, for instance, Campbell Soup appointed Camille Pierce as the company’s new president and “chief culture officer.” Gitlab hired Darren Murph as its “Head of Remote.”
“A lot of companies are trying to let the office win back employees,” says Terrano. “We’re finding that even with remote work, people want an office—whether it’s for whiteboarding or collaboration. There’s nothing like tapping someone on the shoulder if you have a question and having that real human connection you can’t get on Zoom.”
Going forward, expect to see more tools that aim to create more welcoming office environments. And employees will continue to have more options for where they work, forcing the traditional office to transform from a “people warehouse” into a learning lab that’s centered around culture and experience, says Moore.
Armed with survey information and decision-making data about where people want to live, who is coming into the office, when, for how long and for what purpose, employers are better prepared to accurately design the post-COVID office space—along with the events, culture and policies that will attract and keep employees now, and in the future.
