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Covid-19 is reshaping the outlook for office space

Covid-19 is reshaping the outlook for office space

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Lighthouse Technology Services decided earlier this year to relocate to Seneca One tower, with its sweeping views of the region.

Then the Covid-19 pandemic struck.

Suddenly, offices everywhere were emptying out. Vast numbers of people started working from home, due to health and safety concerns. And as companies realized that productivity didn't suffer from workers being at home, it raised questions about whether businesses really needed all that office space.

Lighthouse Technology decided it still did.

"We had to take a good, hard look at all the uncertainty going on with making large business decisions, like real estate," said Randy Harris, president of Lighthouse, an information technology and staffing company. "Even still through all of that, we felt there was no place that we would rather be. Part of it was a little bit of a leap of faith." 

Lighthouse later this month will start moving into the tower's 28th floor from Cheektowaga. The company has committed to new office space at a time when Covid-19 has thrown a curveball to the office real estate market.

But in Buffalo and around the country, developers, brokers and companies are taking stock of the pandemic's impact. They are assessing how it will affect demand for office space, both immediately and in the long run.

In the short term, companies are acting cautiously about bringing employees back to offices in large numbers. That's due to a combination of factors: concerns about health and safety, uncertainty about school schedules and day cares, and results of the work-from-home approach. Some of the region's largest users of office space, including M&T Bank and BlueCross BlueShield of Western New York, have extended their work-from-home policies until at least the end of the year. 

The long-term impact on the region's office market might not be clearer until tenants' leases expire, when companies take a fresh look at how much space they truly need.

So where does the office market go from here? How much of the way companies are working now is a stopgap solution, compared to something permanent?

James Militello, president of Militello Realty, said it's difficult to draw conclusions just yet.

"Overall, the market is pausing, except for those forced to make a move," Militello said. "Common sense is indicating that there is going to be a rework of how office space is used if there isn't a vaccine."

While many companies are deferring decisions about office space, firms whose leases are expiring have to act now, he said.

But one factor tenants and landlords will have to consider is how health and safety rules affect occupancy inside office space. The restrictions could mean less square footage available for employees to use than in the past, which figures into the cost of leasing space.

Despite all the uncertainty, Militello believes office space has a future.

"There are people that are still functioning in these environments," he said. "You can't have everyone all at home. There is a need for space. It's just a question of how to make it safe and cost-effective long term. That's the challenge."

Shana Stegner

Shana Stegner says office space will still have its place. 

Shana Stegner, CBRE Buffalo's managing director, described current activity in the office real estate market as a mixed bag.

"For a lot of people, it's too soon to tell to make decisions and they don't want to react too quickly," she said. "We are seeing some shorter-term renewals. At the same time, there are people that have to make a move and continue on, and there is a decent amount of activity."

Businesses say health and safety concerns are their top issue in deciding when to bring employees back to offices. They are also evaluating results of the work-from-home model over the past few months, and many like what they've seen. The upside: Smaller offices would save companies a lot of money.

But there is also the question of how companies can build workplace culture and promote collaboration while employees are dispersed. In recent years, the trend in office space was replacing cubicles and private offices with an open-space format, to encourage interaction among workers. That format, however, is less practical in times of social distancing.

"The No. 1 thing that people miss while working from home is the culture and the environment and the collaboration," Stegner said. "There are firms that are built on their culture. I do think without a doubt there will be a demand and a need for the office space."

CBRE, a worldwide real estate firm, recently published a midyear analysis of office space. The firm says its global surveys find many office users will increase their use of remote workforces post-Covid and their investment in technology to support it.

"This does not suggest a full-time remote workforce, but rather one that will have more choice over where they work, creating a more hybrid workforce not bound by the barriers of a physical office to remain productive," CBRE said in its report.

Rand Building

The Rand Building pictured in 2016.

Paul Kolkmeyer is waiting to see what companies decide about office space. His firm, Priam Enterprises, owns properties including the Rand Building. Kolkmeyer said some potential tenants are looking around and evaluating what's available in the market.

"We've got nobody signing on the dotted line right now," he said. "I think it's a buyer's market, and I think they really have their pick of the litter at this point."

And he knows different tenants might come to different conclusions about office space.

"In the long run, a number of people are saying, 'We've got to get them all back [to the office],' " he said. "But at the same time, I think some are looking at it and saying, 'Boy, I can reduce my space if I allow more people to work from home.' I'm seeing both sides of it right now."

But Kolkmeyer said it's hard to recreate the personal element of office work while at home.

"You lose the social activity between your people and their ability to talk to each other and commiserate very easily about issues and problems they might be having," he said.

If workplace health and safety concerns are resolved at some point, what might employers decide about their need for office space?

Cushman & Wakefield CEO Brett White joins CNBC's "Squawk on the Street" team to break down its earnings and how he anticipates office space demand to recover eventually. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi

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While many companies have praised the results of working from home, Jim Lemoine, assistant professor of organization and human resources in the University at Buffalo School of Management, said research on the subject points to something different. 

"The research side is pretty clear that there a lot of challenges with virtual teams," Lemoine said. "Beyond the personal advantages of flexibility and work/life balance, there aren’t really a lot of advantages for organizations."

One of the challenges for organizations, he said, is measuring how productive their virtual teams are.

"Research has found that organizations and managers are really bad at assessing performance of virtual teams," Lemoine said. "It’s hard to keep track of who’s doing what, how much has the team progressed, because we’re not used to that. We’re used to doing it when we’ve got everybody right in front of us and we can talk to them face to face."

Some of the things co-workers are accustomed to in an office setting – for instance, sharing a creative thought that pops up during a meeting – are harder to do on video conference calls, when everyone is routinely asked to mute themselves at the start, he said.

Research has shown virtual teams struggle with relationship building, which can be important for making employees feel comfortable with bringing up ideas with others or saying when they think something is wrong and needs fixing, Lemoine said. 

"People are more reluctant to do things like that (on a virtual team)," he said. "They have trouble building strong connections when they're just a tiny face on a Zoom screen versus being in person right next to you.

Amid the debate about the future of office space, there is Seneca One, Buffalo's tallest building, which keeps adding tenants.

The tower is preparing to house M&T's "tech hub." 43North and a tech firm, Odoo, are already tenants. Now Lighthouse is preparing to move in, as is Serendipity, a shared-office provider.

Randy Harris with Lighthouse Technology Services at Seneca One tower discusses their new 28th floor office space at the building.

The building's owner, Douglas Jemal, recently said he believes people are eager to interact in person once again.

"We're sick and tired of sitting in the four rooms in a house," he said. "I think if you make a sense of place and a sense of being, people are gonna want to be here."

Harris, Lighthouse's president, said he was drawn to Jemal's vision for Seneca One, as well as all the new development that has taken place downtown. Harris said his company in the past viewed office space as more of a cost, but at Seneca One views it as more of an asset, an opportunity to connect with others in the tech world.

"I can tell you right now, already a lot of our employees who primarily work from home are actually really excited to spend more time in the office because of the wonderful experience they've just gotten a small taste of in tours of Seneca One," he said.

Matt Glynn

The Buffalo News: Good Morning, Buffalo

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