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With COVID-19 impact, will suburban businesses still need all their space?

Byline: Richard Klicki Business Ledger Editor -CLMN-

Kim Defily and her team have been busy the past several weeks.

Defily, portfolio manager for American Landmark Properties in Schaumburg, and her team have been taking advantage of the empty office building she manages at 1400 American Parkway to schedule several maintenance projects to assure the iconic suburban tower is ready for the return of its tenants, which include businesses such as HR payroll software company Paylocity.

But in addition to the usual spring cleaning, Defily's team is making numerous adjustments to the structure to assure tenants return to a work environment that takes COVID-19 health concerns into consideration.

From signs stressing social distancing and face masks to technology such as "touchless" elevator buttons, the building will have a decidedly different look and feel from the one employees vacated when Illinois went on lockdown to slow the spread of the deadly virus.

"We're trying to make it as easy as possible for the tenants when they do come back," Defily said.

But as landlords prepare for the return of tenants, the question remains as to how many will come back at full strength. The whiplash recession that followed the lockdown put many businesses on the brink of failure, and it is still unknown how many of those on the edge will return.

For those that do survive, many will come back leaner, the result of layoffs and streamlining. Others have found success with having employees work from their homes and are reassessing if they need as much space for their workforce.

So as landlords get buildings ready, will their tenants return?

Will they come back?

The suburban commercial office market came to a sudden halt in March, following several years of steady gains as companies took advantage of cheaper rents and updated amenities to either expand or relocate from Chicago.

The suburban office vacancy rate stood at an average of 16% when the state's COVID-19 stay-at-home order occurred, according to Jim Adler, executive vice president of office services for Oakbrook Terrace-based commercial real estate firm NAI Hiffman.

But the market did not completely freeze up, he noted, as some deals that were close to finalizing were made.

"We all experienced some fallout," Adler said. "Some things progressed as planned and others are on a wait-and-see approach as the story continues to unfold."

As companies reassess their ability to have workers work remotely, the concern is they will eventually abandon or downsize their office space. But while vacancies will likely increase in the near future, experts are not anticipating a glut of empty offices.

"There will be some subleases and some spaces with companies that do not come out of this situation whole, but I don't see this as a mass glut of space coming online," said Ellen Steinbrecher, principal and managing broker of boutique commercial real estate firm Reologie in Chicago.

Adler noted the suburban market may actually see at least a short-term boost in leasing as downtown companies, concerned over the safety of employees using mass transit and the confinements of high-rise buildings amid the COVID-19 pandemic, may open "satellite offices" in the suburbs.

"Some call it a third office, because you have your main headquarters, then the second office is home, and the third office is the suburban satellite office," he said.

Initially, Adler believes this will be seen in the sublease market as companies pick up furnished space that is "ready to go" as well as single-story office space.

"It will provide some flexibility as companies navigate the pandemic," Adler said. "Even if a small percentage of the downtown market were to think about a suburban office, that could be a shot in the arm for the suburban office market."

With the move to Phase 3 of Illinois' reopening plan, businesses are starting to figure out how to bring employees back to the office. But that isn't as easy as opening the doors and hoisting a welcome back sign, experts note.

No guide to reopening

"Everybody knows we need to get on with business, but nobody knows quite how it's going to play out," said Michael P. Mulcrone, executive director of the Schaumburg-based Building Owners and Managers Association of Suburban Chicago.

What complicates the matter is that both landlords and tenants will need to reassemble the workspace to comply with new safety and health measures. Things like providing social distancing for employees, assuring surfaces are cleaned and disinfected regularly, and mandating policies like wearing face masks now have a much higher priority, he said.

As a result, most experts see a slow return to offices, with companies bringing back employees in stages, or opting for a "hybrid" operation of an office/remote work mix.

"I see this as being a stepped process." Steinbrecher said. "Half the people come back, and half stay at home."

Mulcrone added the return to a fully functioning office could take as long as two years, as employers gingerly incorporate their business needs with their employees' need to feel safe at work.

"There's no clear-cut plan that everybody's doing," Mulcrone said. "It's just a big experiment at this point."

Fewer employees, more space

Even if employers bring back a portion of their staffs, Steinbrecher noted accommodating employees for social distancing will likely mean the company will still need all of its original space. Office designers went from figuring about 150 square feet per employee to about 275 square feet today, Steinbrecher said.

"Even if you've gotten rid of half of your employees, if you're doubling the square footage, are you really needing less space?" she added.

Patrick O'Malley, whose Arlington Heights-based O'Malley Construction Company has been busy refitting Chicago office buildings to meet COVID-19 safety concerns, said a number of clients have been reworking existing office space to assure workers feel safe.

"You won't see as many butts in seats," O'Malley said. "They are looking at a lot of collaboration spaces where they can still practice social distancing. Some open concepts will still remain, but there will be infrastructure and AV/videoconference upgrades.

"(Clients) are looking at how to manage how many people will be there on a certain day and how the building will work with that," he added. "They'll change the way they use their space, not necessarily what space they have."

The social dynamic

No one sees the office going away in favor of employees working remotely.

"The social dynamic of an office is very important," said Steinbrecher. "It's not the same to do a Zoom meeting or a team meeting. The social collaboration is important."

What she and others see are workers sharing space as employers rotate staffs between in-office and remote work.

"It's not having your own cubicle with your own plants and pictures, but more of a shared kind of environment," she said. "You still come into the office, but you don't always have your own desk."

Adler added: "Working from home will be a nice accommodation, but I do think we are all going to get back to the idea that the office is the primary place we all want to be as companies."

But whatever the new office world will be like, Defily and Mulcrone stress the importance of building managers and landlords welcoming their tenants back into an environment where they will feel safe and comfortable.

"Running a commercial office building is about customer service, and so these professionals are struggling with how do we get this right, and how do we protect our guests and our owners from liability and issues," Defily said.

"There's not a clear path just yet."
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Title Annotation:Biz Ledger
Author:Richard Klicki Business Ledger Editor -CLMN-
Publication:Daily Herald (Arlington Heights, IL)
Date:Jun 22, 2020
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