The New Normal in Commercial Real Estate – What Responsible Companies Need to Know

 

Despite the headlines that “work from home” policies would kill the office as we know it, the commercial office industry seems poised to return as vaccinations increase and office workers are eager to collaborate with co-workers in person again.[1]  According to a recent survey, younger office workers in “Gen Z” may be particularly eager to return to work, since they are more likely in entry-level jobs where getting noticed by managers is easier through in-person interactions.[2]  According to a recent survey by CBRE, only 9% of companies plan to significantly reduce their office footprint. The same survey found that 85% of companies expect their employees to spend at least half their time in a physical office.[3]

1

THE COMMERCIAL OFFICE INDUSTRY WEATHERED THE PANDEMIC BETTER THAN OTHER SECTORS

Unlike sectors like retail and hotels, commercial office properties retained their value during the pandemic. According to Green Street, property prices in all commercial real estate categories are improving, and their overall Property Price Index is only 1% lower than pre-Covid levels.  The Office index is up 1% over the last 12 months.[4]

Notwithstanding the pandemic, most large office owners continued to receive rents from their tenants. Although lease terms dropped during the pandemic, the average tenant lease rose to above 7 years by Q1 2021.[5]  Office leases are typically long-term, which meant that tenants continued to pay their rents even as offices sat empty during the pandemic, allowing office owners to maintain their debt obligations throughout the Covid-19 crisis.[6]  The top 10 Office REITs saw an average of less than 6% drop in rental revenues between 2019 and 2020.  However, these same top 10 companies had a more than 6% increase in rental revenues between 2018-2020.[7]

WORKERS OF COLOR—INCLUDING ESSENTIAL WORKERS AT COMMERCIAL OFFICE PROPERTIES—FACED A GREATER RISK OF EXPOSURE TO COVID-19 AND DISPROPORTIONATE ECONOMIC HARM DUE TO THE PANDEMIC

The pandemic laid bare the inequalities and racial injustices in our country, which extended to the experience of frontline workers who cleaned, maintained, and secured the office buildings throughout the country.  While many office tenants were able to work from home, janitors, security officers, and other service workers had to report to work in person.  There were racial and economic disparities in who needed to report to work and who could stay home.  According to the CDC, racial and ethnic minority groups are disproportionately represented in essential work settings.[8]  The Urban Institute found that Black, Native American, and Hispanic/Latinx workers are more likely than white workers to hold jobs that placed them at greater risk for exposure to Covid-19, and more than half of all Black, Native American, and Hispanic/Latinx workers hold essential or non-essential jobs that must be done in person and close to others, compared to 41% of white workers.[9]  The wealthiest 20% of Americans were more than 10% more likely than the bottom 20% to work from home and avoid risk of infection from community spread.[10]

While top executives retained their wealth during the pandemic, frontline workers struggled to get by. Even if some commercial office CEOs saw lower compensation because of the market drop, the top CEOs of office REITs earned an average of $7.5 million in total compensation in 2020, which represented an average increase of 23% between 2018 and 2020.[11]  Meanwhile, a report by the Robert Wood Johnson Foundation, NPR, and the Harvard School of Public Health found that the majority of Latinx (72%), Black (60%), and Native American (55%) households report facing serious financial problems during the coronavirus outbreak, compared to just 37%  and 36% of Asian and white households, respectively.  More than 4 in 10 Latinx, Black, and Native American households report that they have used up all or most of their savings during the pandemic compared to a quarter of white households.[12]

Working families were struggling even before the pandemic hit.  The average cost of living in U.S. cities grew 17% between 2009-2019,[13] and the cost of housing and health care grew even faster.  The national average rent increased by 36% between 2010-2019.[14]  The average premium for family health care coverage increased 20% between 2014-2018 and 55% between 2009-2018.[15] These rising costs have eroded any wage gains workers have made.  A 2018 Pew Research Center study found that the average 2018 hourly wage had about the same purchasing power as it did in 1978.  The same study found that any gains have largely gone to top earners: the lowest quarter of earners saw about a 4% increase in real wages, whereas the real wages of the top tenth percentile rose almost 16%.[16]

THE “NEW NORMAL” SHOULD ACCOUNT FOR THE CONTRIBUTIONS OF ESSENTIAL WORKERS TO THE COMMERCIAL OFFICE INDUSTRY DURING THE PANDEMIC AND BEYOND

Commercial office is an important contributor of local economies and can play a role in lifting up the lives of the janitors and security officers who clean and maintain office properties.  A 2020 study by the Building Owners and Managers Association (BOMA) found that the economic impacts of office buildings served by the local associations of BOMA International contributed $204.4 billion to the national GDP.[17]  Union janitors, the vast majority of whom work in office settings, won more than $1 billion in pay raises through their collective bargaining agreements over the last 5 years alone, providing a boost to the workers’ families and neighborhoods where these cleaners reside.[18]

The return to working in offices will undoubtedly look different. While we learn to navigate the “new normal” of the post-Covid office environment, let us not forget the essential workers who have kept the buildings running throughout the pandemic.  The “new normal” in commercial offices must include essential workers and address the racial and economic inequalities that the pandemic exposed and exacerbated.  Owners can do their part by using responsible contractors who pay fair wages, provide appropriate safety equipment, and promote policies that create a just environment for all.

  • [1] Trepp CMBS Research. CRE’s Next Test – The Return to the Office; Major MSAs Show Occupancy Declines. June 2021.
  • [2] Pollack, L. Here’s Why Gen Z Workers May Be Inclined To Ditch WFH. GlobeSt.com, 3/17/21. Last accessed 6/13/21.
  • [3] Pollack, L. New Data Show Few Companies Will Dramatically Reduce Office Footprint. GlobeSt.com. 6/11/21. Last accessed 6/14/21.
  • [4] Green Street. Press Release: Property Prices Increase another 4% in May. 6/4/21.
  • [5] JLL. United States Office Outlook – Q1 2021. 4/20/21. Last accessed 6/13/21.
  • [6] Trepp CMBS Research. CRE’s Next Test – The Return to the Office; Major MSAs Show Occupancy Declines. June 2021.
  • [7] SEIU analysis of Capital IQ data. The analysis includes the top 10 Office REITs based on market capitalization as of 6/5/21.
  • [8] CDC. Covid-19 Racial and Ethnic Health Disparities. 10/20/20. Last accessed 6/13/21.
  • [9] Urban Institute. How Risk of Exposure to the Coronavirus at Work Varies by Race and Ethnicity and How to Protect the Health and Well-Being of Workers and Their Families. December 2020.
  • [10] Serkez, Y. These Charts Show that Your Lockdown Experience Wasn’t Just About Luck. New York Times. 3/11/21. Last accessed 6/17/21.
  • [11] SEIU analysis of top 10 CEO compensation for the top 10 Office REITs using Capital IQ data. The data include the total compensation earned and/or received for top 10 Office REITs based on market capitalization as of 6/5/21.
  • [12] Robert Wood Johnson Foundation, NPR, T.H. Chan School of Public Health. The Impact of Coronavirus on Households, by Race/ Ethnicity. September 2020.
  • [13] SEIU analysis of CPI data. Consumer Price Index data pulled from the Bureau of Labor Statistics for all Urban consumers from 2009-2019.
  • [14] Lupa, Irina. The Decade in Housing Trends: High-Earning Renters, High-End Apartments and Thriving Construction. 12/16/2019. RentCafe. Last accessed 6/12/21.
  • [15] Claxon, G., Rae, M., Long, M., Damico, A., Whitmore, H. Health Benefits In 2018: Modest Growth In Premiums, Higher Worker Contributions At Firms With More Low-Wage Workers. Health Affairs. Volume 37, Issue 11. 2018. Last accessed 6/12/2021
  • [16] Desilver, D. For most U.S. workers, real wages have barely budged in decades. Pew Research Center. 8/7/18.
  • Last accessed 6/12/21.
  • [17] BOMA International.  BOMA 2020 Office Market Study: A new perspective on the impact of U.S. office buildings in the economy.
  • [18] SEIU analysis.