Office demand may never be the same after COVID-19
What's next for real estate: Office Market
A day at the office may never be the same. And the same goes for the contractors who build those offices and the landlords who own them.
The deadly COVID-19 pandemic prompted workplaces to shut down and employees to toil from home. However, many bosses and workers alike — nearly half of them, in some surveys — have discovered that their companies’ business could be conducted just as efficiently from the den or spare bedroom as from the cubicle.
So why build or rent office space? Construction companies, commercial real estate agents and property managers alike in the Boulder Valley and Northern Colorado still are waiting for the new economic reality to sort itself out.
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“For us, it’s really a mixed bag right now,” said Gregg Meisinger, owner and president of Loveland-based Coe Construction. As for projects ordered before the coronavirus crisis set in, he said, “some projects have been canceled for sure, some are moving forward just fine, and some are slipping on the schedule. It’s the full gamut.”
Coe is getting orders for some tenant-finish work but no new office space, Meisinger said, adding that he has yet to see changes in the configuration of existing offices based on the requirements of social distancing.
“I’m not seeing any kind of new programming yet,” he said. “My hunch is that it’s coming but it hasn’t gotten to us yet.”
Part of that mixed bag is reflected on the balance sheet, Meisinger said. He estimated that the slowdown in business has trimmed Coe’s revenue by “maybe 10 to 20%,” but his payroll is down as well because the requirements of social distancing mean “we’re not able to put as much manpower into a project as we did. The head counts are down — about 30 or 40% less.”
Fewer workers on a project means each project takes longer, he said. With construction projects lasting anywhere from four months to a year, he said, “pre-COVID work is still heavy on our backload,” so it’s too soon to tell what Coe’s year-end profit margin will be.
“I think it’s going to be holding steady with our volumes this year; 2021 should be about the same as 2020 for us — and 2020 will be down because of the shutdown.”
Construction companies are prospering from contracts with national accounts such as franchise restaurants, he said, “but no new office space because there’s so many people still working from home today. In six months I think there could be a large glut of office space — a lot of office space available.”
When it comes to leasing or selling those office spaces, however, Stephen Tebo is a bit more bullish. Tebo, owner of Boulder-based Tebo Properties, one of Colorado’s largest commercial real estate firms, said his office signed a dozen leases in July, some as a result of negotiations that had been under way for several months. But his calls have dropped from 25 to 15 a week, he said, and some of that business is “people offering to downsize their offices.”
One tenant wanted to downsize from 42,000 square feet to less than 20,000, he said, but he also just upsized a tenant from 18,000 to 32,000 square feet and renewed a 22,000-square-foot lease for five more years.
“Every single deal is different.” he said. Why?
“There are two schools of thought,” Tebo said. “One is that a lot of people are comfortable working from home now. But I think a majority of people still love the office atmosphere, the camaraderie. Maybe instead of cubicles, though, they’ll want to work in their own office.”
Ryan Schaefer, chief executive of the NAI Affinity commercial real estate firm in Fort Collins, isn’t so sure. Speaking via video chat to BizWest’s Northern Colorado Real Estate Summit in June, he said he expected the virus to continue reshaping the sector for months and years to come, and if social distancing and the fear of being close to others persists, that could cause a collapse in interest for new office space.
Schaefer said he expects major technology firms such as Apple, Google, Amazon and Microsoft to continue to dominate the market for new class-A properties in technology hotspots such as Boulder, but thinks the growth curve for office space in cities without major technology presences will be poor for a while.
A bit of new office space is coming online in the region. For instance, Wolski Building & Development planned to complete construction on an 8,200-square-foot multi tenant mixed-use development in downtown Erie — including office space as well as retail and restaurants — in July with tenants moving in by the end of the month. And a few projects are being planned before tenants have been signed, including Boulder-based real estate developer and commercial landlord W.W. Reynolds Cos.’ proposal for a 111,645-square-foot research office and laboratory building in the LakeCentre Business Park, near Boulder Municipal Airport.
Like property managers in all sectors, Tebo said this spring’s economic shutdown, when many businesses were forced to close or drastically cut back on commerce, has meant tenants are having trouble paying their rents.
Some have just stopped paying altogether. The Wall Street Journal recently reported that co-working company WeWork stopped paying rent at some of its U.S. locations while it tries to renegotiate leases — even as it continues to charge its own tenants.
“We’ve had to defer a lot of rents, at least half the people,” Tebo said. “Some are able to come through, though, because the PPP (checks to businesses through the federal Payroll Protection Plan) helped a lot.
“It’s definitely a challenge between tenant and landlord,” he said. “It’s just a matter of working together.”
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