Change is Hard

While change is generally a constant state, big changes in one area can have the effect of spurring many additional changes in related areas.  In most cases we’re not very good at forecasting all the add-on changes that may follow the initial change.  We’re like low skill chess players, unable to see the full spectrum of opportunity and vulnerability created by our moves.  And when big change requires us to take action, we often seek the comfort of doing what everyone else does as opposed to formulating our own approach.  In the business world, this is a byproduct of risk aversion, or what can be called CYA at scale.  Our corporate structures don’t typically provide incentive for creative, individualized responses to business challenges.   
 
The effects on the office market is a great example of the kind of ancillary, unanticipated change that occurs as a result of a seemingly unrelated big change; in this case, the global reaction to the pandemic, in which office workers were sent away from their offices to work from somewhere else.   While this safety measure was taken to mitigate the spread of the virus, few could have predicted it would have lasting, dramatic impact on the office markets.  Yet while the current state of the office market can be correlated directly to the changes brought on by the pandemic, other factors, factors which began playing out way before the pandemic, have also contributed, notably the technologies which have steadily separated work from office.  It’s been our observation that corporations have struggled to respond to this moment because doing so requires them to take independent actions that are not widely supported by industry standards.  Companies are mostly formulating their own views on return to office, the extent to which they work in-office, or adopt a hybrid or virtual workplace strategy.  And since the choices they make will translate directly to employee engagement, productivity and happiness, there’s a lot at stake.
 
While we’re in the early days, some interesting trends are emerging as occupiers begin to make longer range choices about the office.  Firstly, corporations are choosing to solve for use and experience, not headcount.  This means that if a company has 100 people in a given market, but only 20 regularly use the office, the office solution will solve for closer to 20 than 100.  At the same time, companies are studying how those 20 actually use the space and seeking ways to enhance employee experience, both in and out of the office.  Many are discovering their offices no longer serve the purposes they once did. This is especially true when it comes to the provision of individual, dedicated work space.  The overall effect is trending toward smaller, custom designed spaces that serve very specific purposes such as brand promotion, team collaboration/culture building and client-facing activities coupled with technologies and improved work flows that enable employees to enjoy greater flexibility in working from anywhere, any time.  The office as a place for employees to go each day to do their work is increasingly uncommon.
 
In March of 2020 we really didn’t know that in March of 2023 we’d be grappling (on a global scale) with how we use office space.  The consequences of this change, from a monetary perspective, are significant and effect market participants differently.  Those invested in the market circa 2019 have been forced into a new normal, which in the case of San Francisco, means adjusting from 4% vacancy to 24% and climbing.  Investors stand to see the value of their assets decline significantly.  Employees generally want more flexibility and a continuation of the kind of work-life they’ve enjoyed since the pandemic began (although there are many nuances here).  The continuance of flexible workplace solutions is valuable to these employees.  Companies, on the other hand, are mostly unsure how the choices they make will impact value because no one can really quantify the value impact of the office on productivity.  It may be a little easier to quantify the impact of the office strategy on employee experience and happiness, which should have an ancillary impact on recruitment and retention.  But the decision to bring everyone back, go hybrid or virtual is fraught with bad judgment, flawed leadership bias and a lack of good data.
 
Once change begins at scale (like that we’re seeing in the office markets), you can’t turn back.  This is no longer about heading back to the office construct of 2019 or simply choosing some other solution.  For occupiers, it’s a complex decision tree that has many important value outcomes.  For the moment, the supply side must wait patiently while occupiers figure this out.  Investors are left to reposition their assets and manage the debt and equity stack in order to stay alive to fight another day.  It’s an unpleasant time.  Change is hard.