When it comes to office space, some firms find better is better — but bigger is not
When it comes to office space, some firms find better is better — but bigger is not
This Friday, we’ll get the jobs report for the month of July, where we’ll learn how many people are working and in what kinds of jobs. But what about where they’re working?
For office workers, the Federal Reserve’s most recent Beige Book gave us a hint about some of the workplaces people are occupying. The Richmond Fed said agents in Virginia and Maryland reported tenants were “rightsizing” their offices and upgrading from Class B to Class A space.
So what does that really mean?
Class A office buildings are what they sound like: classy, nice views, good parking, crazy fast internet. Maybe a cafeteria right in the building. Class B buildings might have been Class A, like, in the 1980s. But now, the elevator’s kinda creaky and the fixtures are pretty out of date. And as for Class C?
“Maybe the heating and air works every day. Maybe it doesn’t. But, you know, the rent’s cheap,” said Scott Wimbrow with MacKenzie, a commercial real estate firm that manages and leases office buildings, primarily in Maryland.
Wimbrow said Class C buildings in Baltimore tend to rent for between $10 to $15 per square foot, while for an A Plus building with a view of the water, that number’s in the mid-40s. He said there’s a market for every building type: The fanciest office buildings are usually occupied by corporations or big names in finance and law, whereas C buildings are often rented by small businesses.
“They don’t mind climbing a few steps, they’ll bring their lunch to work,” said Wimbrow. “They don’t need a place to impress anybody.”
But recently, some companies want to impress their employees. Wimbrow said some employers are opting to shrink their office footprints by 15% to 25%, but they want those footprints to be a whole lot nicer.
“So their annual rent cost is the same, more or less, but they’re getting much nicer digs,” said Wimbrow.
It’s not always just nice digs some tenants want, but fancy amenities, too.
“I’ve called it an almost religious belief among a certain segment of tenants that what they need in the post-pandemic workplace is they need everything,” said Phil Mobley of the CoStar Group, a global real estate data and analytics firm.
Think: in-lobby concerts! Chair massages! Free blowouts!
Mobley said some big, multi-site companies believe all this will attract talent, and make that talent want to come into the office.
“We’re sort of agnostic on whether that’s actually true, and whether the space really does create that sort of stickiness and attraction,” said Mobley.
Other employers are going the opposite route. Mobley’s seeing some of the lower quality office spaces get snapped up because they’re affordable.
“There are plenty of occupiers out there who just need a place to park people, and they want to do it as cheaply and efficiently as they can,” Mobley said.
So, Mobley said it’s the buildings that are more toward the middle — between the top 10% and above the bottom 60% — that are being hurt the most.
It is sometimes possible to renovate an older building — say, upgrade a Class B to an A. But it’s expensive.
“So we’re also seeing some landlords essentially pull back a little bit,” said Chris Hudgins, a research analyst at S&P Global Market Intelligence. “And make the judgment call of, ‘Do I want to invest more capital into this property? It’s a risky situation in the sense that if I invest all this capital, and we still can’t draw tenants into this property, there’s still more office space than there are tenants. Is it worth my return on investment?'”
One thing that makes that judgment call even harder is that the amount of office space tenants use has been going down. Companies don’t need server closets if they’re using the cloud. File cabinets and law libraries? A lot of those have gone away. So, this “rightsizing” has been going on a while and the changes to how we work in the wake of the pandemic have accelerated it.
“If you have your team coming in on different days of the week, they don’t necessarily need a dedicated office,” said Ryan Price, chief economist of the Virginia Association of Realtors.
A lot of this is still shaking out. Businesses are figuring out exactly how much office they need, how much they are willing to pay for it, and landlords are figuring out how far they’ll go to accommodate them.
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