Assetsoft - Blog #Office

How We See The Office Industry Shaping Up

Thu, 17 Jun 2021 11:00:00 -0500

It’s an understatement to say that COVID caught everyone off guard. Households, businesses, enterprises, and even governments failed almost equally at estimating the best practices during the onset.

Thankfully, it feels like the worst period might have finished now. Now, we just need to get used to living with the current safety measures and business practices. Most importantly, we should take note of which practices might be here to stay.

The office industry is most likely going to change. It’s already shifting rapidly, and many of the new measures companies have taken will most likely remain for long after COVID is gone.

What are office investors focusing on?

Office investors are one of the best ways to assess where the industry is headed. They monitor current situations for the ideal investment. That means spotting opportunities that can provide the best returns in today’s context.

CREOnline has an interesting article on office space trends, and we can highlight their most important observations.

Locations

Choosing the right location is critical if you want to survive the market during danger. That’s even more truthful for real estate companies, as location is paramount. Office buildings need to be located conveniently if you want profitable rents.

As the real estate sector calms down, you might be able to find better offers, but also stronger competition. Additionally, social distancing and cities’ propensity to outbreaks can play a big role determining ideal locations.

Infrastructure

Naturally, solid infrastructure also plays a huge role in your property’s profitability. Maintenance and CapEx are vital factors to consider, so infrastructure condition is paramount to keep in mind when investing.

Office space usually requires specific metrics, like room space, power outlets, and proper insulation. Ideally, you want to stick with low-maintenance design, like metal and glass instead of wood.

Credit

With today’s looming recession, any company or lender should think twice about who they’re leasing to. You should always aim for A-grade occupancy in your properties. These occupants guarantee responsibility with their rent payments regardless of the times.

That doesn’t mean going for large firms. It’s easy to assess a tenant’s quality with their track record. Your priority should be having people who can pay when they’re supposed to. There aren’t many reasons to assess their occupations. It’s harder to find good tenants with the pandemic, so you should take the ones that do show up.

Timing

Timing is a crucial factor to keep in mind for any investment, and real estate isn’t the exception. Timing matters because it plays a vital role in your property’s value and your returns. Right now, buying might be difficult because of the reduced supply, so you should be mindful of when this will change.

The best way to assess whether or not you should buy is to consider cap rates. Office property should have a 7% cap rate in the market. You should never buy when the cap rate dips below that percentage.

Spreads

Closely related to cap rates, we also have to consider spreads. If you’re not an expert investor, it’s okay. Your spread is basically the difference between the aforementioned cap rate and your loan’s interest rate.

Your spread’s values can vary quite wildly. It’s measured in points, and more points mean better returns. For simplicity’s sake, you should aim for a two points minimum, which often translates into around 15% returns.

How could offices look post-pandemic?

The coronavirus crisis has reshaped countless industries differently, but there’s always one thing in common. Every firm has implemented modern strategies and software to enable remote work and customer service.

The World Economic Forum compiled several innovations that could make it into our office spaces for long after the pandemic is gone. You might see several of these coming already: co-working and hygiene are easy predictions.

That said, other solutions, like Facebook’s, could change the world forever.

AR Stations

Let’s dive into the most surprising one. Several sites have reported Facebook’s experiments with augmented reality and futuristic desks. There’s already footage of how these “mixed reality” desks work.

That’s because Facebook is planning to make remote work a free choice for its employees. Their technology is an early implementation of a new platform that can merge virtual and augmented reality to develop virtual rooms for coworker collaboration and meetings.

Just like you’d expect from sci-fi, this hub would assign avatars to every worker. We still have to wait, but it’s a great example of how the pandemic is changing office spaces.

Distanced offices

To keep things balanced, we need to remind you that office life isn’t really going to disappear. Office spaces face their own adaptation challenges, and what’s called the “six feet office” is one of the many possibilities.

Distancing guidelines will likely stay for a while as vaccine development and testing goes one. Even after we overcome the pandemic, it’ll be awhile until we can feel safe enough to forget about it.

Some of the most interesting opinions suggest a reversal. For instance, larger desks might be necessary, and simple changes like desk placemats could become standard. Similarly, office density might switch as well, opting for less open layouts.

Signs (more)

Another interesting development we might see is more markings within office spaces. If you’ve been to a grocery store lately, you’ve probably seen distance markers on the floor. These kinds of signs help people keep the recommended distance in lobbies or even elevators.

These visuals instructions might remain for office spaces as time goes on. That’s because reopening operations doesn’t mean COVID is completely gone just yet. Proper circulation is vital to ensure minimal contact, and thus risk.

Less contact

Contactless technology is a relatively new trend that’s gained lots of traction with the COVID crisis. The WEF article points towards Zaha Hadid Architects as a great example of how this technology can change our office spaces.

Their main example comes as pathways, which enable employees to walk around without coming into contact with the building itself. For simplicity’s sake, that includes automatic doors using sensors and similar commodities.

Naturally, it also includes social distancing features, like movement tracking within the building using employees’ mobile phones and notifications. More traditional approaches include wider corridors, more department divisions, and alternative pathways.

Better ventilation

Fresh air is paramount to minimize COVID’s spread. We get reminded of that every day: keeping the windows open, avoiding crowding in the elevator, and more. Given how many offices’ windows can’t open, that’s likely going to change.

If you’re stuck with filtered air, then climate control systems will become vital for any office. Improving air quality and flow can make a world of difference, and it might be easier to access as they become standard.

Larger renovations might also be possible. Open cafeterias and lobbies are possible but more expensive investments.

Dawn of co-working

Many people have experienced co-working spaces during the coronavirus crisis. Co-working spaces need to provide better hygiene and distancing, but co-working might become even more popular.

Co-working has been booming as companies adapt to remote working. As remote work becomes more accepted after the pandemic, co-working spaces could keep their increased footfalls.

What does the Center for Disease Control and Prevention have to say?

Naturally, one of the best information and advice sources is the official CDC website. Thankfully, it’s filled with guidelines for office buildings. Focusing on slowing the spread of the virus, it offers expert insight into what you can do on different areas to help your employees stay healthy.

Their advice splits into three sections, each one focusing on a specific aspect of your office space and different strategies you can take.

Protecting your staff

The first step before resuming operation is to ensure your buildings are actually safe to occupy. Of course, it doesn’t relate directly to coronavirus, yet it’s still a significant change brought by lockdown.

Building maintenance and health assessment services will see greater demand. Back to COVID, the most important evaluation is for the HVAC system to ensure better ventilation. The same is true for outdoor air circulation.

Then, you need to ensure your workplace is safe. You should assess the more hazardous areas of your workplace, where COVID is more likely to spread. Evaluate areas prone to crowding and close contact. Solutions include tightening schedules and improving communications.

The last tip in this section includes applying the control hierarchy. As a summary, you need to assess the ideal way to reduce exposure:

Isolating workers from potential hazards. For safety, use general isolation whenever possible.
Be versatile with how your resources work: remote work, providing face masks, offering daily health checks, adapting shifts, and more.

Worker education

Educating your employees is the best way to help them stay safe. You should provide expert training and resources to provide accurate and actionable information. Focus points should include signs and symptoms, hygiene practices, how to reduce contact, and other safety measures.

You can find excellent posters and signs for download on the internet. Daily notifications and emails are excellent ways to keep everyone on the same page. You should also encourage face covering, and consider remote work for workers who have trouble using the accessory.

Social distancing for elevators/escalators

These two areas are the most common areas for significant crowding, especially elevators. You should promote using stairs as often as possible, and regulate how many people can enter the elevator. Additionally, consider indicating which stairwells and sides are for going up and down.

Make extensive use of signs and indicators for pathways to make proper pathways easier to understand and indicate proper distancing. The same is true for minimizing contact with surfaces and other employees.

Additional inclusions for these areas include hand sanitizer at the entrance of the elevator, or inside, depending on the size. You can also use stanchions on your lobbies to mark your pathways.

Additional advice

The UK government also has extensive documentation filled with tips for offices. It’s definitely worth taking a look if you want more insight than what’s provided in the CDC page. It’s part of their winter plan for COVID suppression while helping the economy.

It’s basically another guide on how to build a healthier workspace, but it offers a few additional tips you can apply regardless of your location.

It’s also worth noting that it’s a bit more than a guide for office spaces. It focuses on indoor environment management, which includes offices as well as operation rooms and contact centers.

Not everyone should go to work

The most important advice there is that you should assess who really needs to go to the office. As a good rule of thumb, you should keep as many people away from the office as you can.

The public sector is more dependent on worker presence. Education and essential services are usually less effective (or simply don’t function) with remote work. Outside of their tasks, you should consult with your employees to assess whether or not they need to be in the office.

Keep in mind that some departments might work from home effectively. However, individual employees might not have the right equipment (a modern computer or good internet) to perform accordingly.

Short-term lease becoming the norm

Fool’s Millionacres also has interesting insight into upcoming trends. Mainly, there seems to be significant chances for short-term leases to become more popular than their long-term counterparts.

The main reason is the pandemic’s effects on familiar and individual income. Job insecurity is unfortunately common these days, and short-term leases provide more versatility in case something goes wrong.

These leases will likely include monthly arrangements instead of yearly ones. Even commercial tenants could join this trend, as many businesses haven’t been able to keep up with the fall in client volume.

Conclusion

COVID is definitely shaping the world as we speak, but it doesn’t have to be something bad. As long as you can plan ahead, you could even take advantage of how the industry is shifting.

Want Assetsoft to help you with different outsourcing work? From lease abstraction to back office accounting, we can help you perform or automate all tasks. Talk to our team today to know more.

Why Office Sublet Spaces May Turn Out To Be More Of A Competitive Threat Than Thought Before

Thu, 18 Mar 2021 09:09:21 -0500

It's not a secret: office space was among the most prominent victims from COVID-19. Work from home, social distancing, lockdowns, and almost every healthcare measure damaged the sector. Most experts agree that it'll take years to return to "normal"—if we ever do.

However, one subsector from office real estate has been surprisingly promising. Most advisors expected office subletting to go down with traditional leases. It seems like that's not the case. According to market analysts, office sublet spaces could become the dominant assets.

Why do they think that? That’s what we’ll find out.

Sublet or lease: What’s the difference?

Sublet refers to renting a rented property. An example would be renting an office floor and renting it to someone else. It divides the lease agreement into three levels: the landlord, the tenant, and sub-tenant.

Sublets are common when a tenant can’t stay or use the rented space, yet they’re unable (or unwilling) to break the agreement. Subletting allows tenants to collect rent from a sub-tenant and pass it to the landlord. The original tenant remains responsible.

Requirements for a sublet

Naturally, three parties are necessary for a sublease. However, a second lease agreement is necessary. The original contract remains relevant, but a new document must represent the new lease.

This new contract usually includes the landlord's firm as well. They must approve the sublet. A few requirements could become relevant depending on the sublease, but we'll go through them soon.

Having modern property management software is also a great advantage for these

What makes subleasing attractive for all parties?

It’s common for investors to believe subletting is an unnecessary complication. However, sublets allow for several benefits compared to traditional lease agreements. We also need to remember how it can become a necessity for tenants.

Subtenants

Companies often leverage subleases when they don't want to commit to a long-term lease agreement. Commercial real estate is a great example, as most terms demand for over five years. Seasonal ventures and fast growth often demand short-term contracts.

Essentially, any business dealing with short-term uncertainty benefits from sublets. It's simple; if you don't know if you want to keep a space for the next couple of years, a traditional lease can be detrimental. Willingness to use sublets also gives companies access to a broader range of options.

Sublessors

The original tenant—or sublessor—benefits similarly from sublets. For instance, their growth may call for more office or retail space. In those cases, leaving the original property might not be viable. Subleasing allows said business to move without breaking their contract.

That's not the only scenario that calls for a sublet. You could also need less space than what you rented. Subletting "leftover" space can help you keep the entire property's value and aid you with your rent payments.

Landlords

Landlords always benefit from tenants who can pay their rent when they need it. Keeping properties occupied ensure they can profit from those investments. It's easy to see why they'd be interested in subletting.

Last year, tenants being incapable of meeting rent wasn’t rare. Subletting allows tenants to meet their rent in these cases. It’s an obvious benefit for landlords, especially since it keeps them from searching and screening new tenants.

The market is starting to lean toward subletting

Earlier this month, Romania-Insider released an article about big office tenants looking to sublet spaces in Bucharest. Companies like IBM and Visteon leveraged sublets to reduce losses. One of the main problems for office owners is having to settle for cheaper rents.

Curiously, this development comes amid expectations about demand surges for office space. Demand is expected to grow up to 30% this year. So far, tenants have performed better than expected, and space optimization is becoming a consideration.

We can use this report as an example of what could happen worldwide as some industries flourish and others face turmoil. Overall, we can expect office space demand to grow as hybrid work shifts (merging remote and inhouse work) and co-working spaces become more popular.

With tenants needing to sublet their spaces, the market meets new supply, possibly lower prices than lease agreements. That's the reason why sublets can become a significant competitive threat.

Landlords could face the most significant challenge

Despite what we've mentioned, the article mentions that landlords will face higher vacancy despite increasing demand. That would cause negative value correction. The leading cause suggested is that moving to smaller spaces leaves more significant properties empty and reduces their demand.

The problem with this thesis is that landlords will still benefit from these sublets. In any case, tenants/sublessors will need to take the brunt of these transactions. If the sublet is cheaper, tenants will have to make up for the difference.

The real problem for landlords comes from upcoming office space developments. These projects add to the current supply, which could surpass demand.

The pandemic caused sublease space to increase inventory considerably

In July last year, National Real Estate Investor had already covered the considerable growth behind office sublets. Interestingly, it’s very similar to the previous report from earlier this month.

The pandemic has been responsible for countless businesses having to cut losses. The sublet market has been growing steadily in response. The article does mention that social distancing could've offset reductions by increasing demand for more space. Unfortunately, that doesn't seem to hold.

Office sublet supply grew considerably last year

Sublet activity as of the article's publication was already high. Even markets like Manhattan, which aren't too familiar with this practice, experienced significant volumes. Experts also agreed that sublet could grow prominently with time, which we've seen has been confirmed.

It’s also worth noting that some sectors experienced negligible sublet increases. It seemed to occur in markets where downsizing was already common before the pandemic. Regardless, virtually no market has been free from the subleasing trend.

The trend could be more robust in troublesome markets

Diversification has been vital during the pandemic. The subleasing trend supports that information, as the article also suggests. Subletting activity has been higher in markets focused on specific industries, like Houston and its dependence on the energy sector.

As discussed, subleases are also a way to cope with financial constraints, which are the norm with COVID-19. Troubled markets, like the energy sector, have needed to sublet their spaces to overcome financial turmoil.

What does this mean for the future?

Despite optimistic expectations for office space, the sublease market can hinder recovery considerably. New developments need to compete with these cheaper options, and that can drive demand down considerably.

However, it could also mitigate traditionally expensive markets where office rent has always been expensive. Additionally, sublease spaces could reduce possible rent drops, which were a noticeable problem in previous recessions.

Regardless, higher office supply from sublets will increase the current market supply, left by countless businesses leaving their office spaces. With potentially lower prices, they could pose a severe risk against maintaining good market demand.

Office space and recovery: Pre-COVID levels could wait until 2025

One of the main problems about sublet spaces is their disruption of the current market supply. Current forecasts are pretty pessimistic. For instance, CNBC estimates that it'll take until 2025 for office real estate to recover to pre-pandemic levels.

According to the article, office space endured more damage than the financial crisis. It peaked at 95 million sq ft. in unused space. It's estimated for this statistic to reach 215 million sq ft. before complete recovery.

What does this mean for office real estate and the current sublet trend?

The outlook is more optimistic than you might think

Interestingly, the article also mentions that office real estate can recover completely. It'll take a while, but employment growth and specific careers becoming more important will feed demand. Most experts agree that office space will never cease to be relevant.

For instance, creating a work culture and training staff is considerably more difficult if done remotely. Similarly, not everyone enjoys working from home because of the many distractions.

Hybrid work and co-working could breathe new life into office real estate

Additionally, remote work could benefit office space as it becomes “more normal” because of what we already mentioned. Many companies will offer hybrid schedules, where people can work remotely and in the office according to their chosen schedule.

This trend will likely encourage co-working spaces, and that requires repurposing office space. Therefore, office real estate could gain demand from multiple sectors, which previously threatened its relevance.

Companies might sublease offices pace to meet demand

However, we need to go back to the main subject: office sublet spaces. Many companies are likely to sublet their rented space to these growing markets. As we mentioned, this can pose a significant strike to the industry’s recovery, as sublets inflate supply.

That means companies will need to keep up with current developments and adjust their lease agreements accordingly. Luckily, this issue might be temporary. If demand surges above sublet supply, new developments will still yield profits.