Surplus Office Space

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On Wednesday, Ford Motor Co. announced that 30,000 employees worldwide will have the option of working from home — for good.
March 21, 2021
by Stephanie Sarkis

In July, these Ford employees can return to the office for tasks that require meeting in-person, such as group projects. They can choose to work from home for any other assignment. The flexible hours sometimes accorded to employees working from home will need to be approved by Ford managers.
For six months, Ford has been surveying employees who have been working from home since March 2020. Ford also formed a consortium to determine possible work-from-home scenarios. In June 2020, a Ford survey found that 95% of their employees would like a combination of an at-home and in-person work environment.

Why is Ford’s move significant after Facebook and other companies have stated that they are moving towards remote work? The automotive sector has yet to have another company besides Ford make a formal announcement that remote work was becoming permanent for at least part of their workforce. Toyota and General Motors have announced that they are bringing remote employees back to the workplace in June or July.
It is also significant that large-scale employers are navigating towards keeping the work-from-home model intact, possibly enhancing employee quality of life through better work-life balance.

Of course, the move towards permanent remote employees also saves companies money. They most likely would not be moving towards this model if they were losing profits. Some employers are downsizing workspaces — such as Target, which is closing a downtown Minneapolis office due to employees now working remotely. Ford is planning on selling buildings and consolidating workspaces after the announcement of 30,000 employees now having the option of working remotely.

The other significant aspect of Ford’s decision is how quickly they moved to make remote work a permanent feature of 30,000 employees. They began research into this model shortly into the Covid-19 pandemic. The amount of energy Ford put towards researching permanent remote work has rarely been disclosed by other companies, with the exception of those in the technology sector.
There is an overall trend towards remote work becoming permanent, even after the pandemic. Job site Indeed reported that remote job postings have doubled since the Covid-19 pandemic and continue to rise. Consider that Covid-19 vaccinations are increasing while remote job postings are still gaining strength.

If there is at least one positive to come out of the Covid-19 pandemic, remote work has accelerated much more than expected, and that trend is becoming permanent in many locations. Additionally, working remotely is showing a trend towards creating happier and healthier employees.

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In direct reference to the foregoing article I submit the following analysis and insights •
©2021 michael moore

It was reported earlier this week that Ford Motors is going to authorize 30,000 workplace employees, who are currently working from home, to continue to do - permanently.

A small percentage of them will, occasionally be required to return to the Ford offices on some days for in-place meetings that cannot be as efficiently conducted or managed working from their HomeSpace.

Ford is, in many ways, an exception to the norm of norms of permanent staff employees. In what way, one might ask? Because Ford (like most automobile manufacturers worldwide) owns and occupies their physical space, the manufacturing facilities and the attendant office space, they are, owners/occupiers of their physical plant.

Unlike many/most corporations, they do not lease nor pay rent to a landlord. That being the case, the most impactful consequence of so much office space being freed up is not as severe a financial burden as, say, the offices occupied by Twitter.

You will recall, a little less than a year ago, Jack Dorsey, Chairman and CEO  of Twitter, was one of the first - if not the first - corporate captains to allow 5000 of Twitter’s staff to work from home, initially indicating it would be a temporary pandemic arrangement, and then a scant few weeks later stating that any employees who wished to continue to work from their HomeSpace following a return to normal times, would be allowed to do so.

Twitter, of course, is a renter, a lessee in the jargon of corporate premises. At that time, as dramatic a decision as that was, it was seen by most in corporate American management, as being an edge-of-the-sword experiment. ZOOM had not as yet hit its stride. Microsoft was scrambling to fine-tune and optimize their TEAMS tools. Sociologists, of course - although intrigued by how such an arrangement might impact the typical family unit - could offer little in the way of guidance for, this was new territory - a completely new landscape that had to rely on trust, confidence, oversight and accountability - by all parties.

Little if anything was mentioned as to the massive financial impact such a change in operations would have - either on the lessee, or the lessor - the Landlord.

So - let’s examine some of the potential fall-out of such a change - as a study on economic impact.

First, the cost consequence to the lessee. An average workspace in an average office building, if configured as a workstation, would measure approximately 6’ x 6’, say. 36 square feet. Private enclosed offices start at 10’x 10’(100 sq ft) and many lower management private offices are based on a footprint of 10’ x 15’(150 sq ft)

For arguments sake, given that most of the staff at Twitter, or at Ford, would be assigned a modular workstation (36 sq ft), allowing for circulation space (aisleways), utility space (storage, coffee bars, lunchrooms, etc) and conference rooms/facilities (from a range of 150 sq ft up to around 400 sq ft) one could assume that the AOS (average occupied space) per employee might be 100 sq ft.

Fair enough, if not even perhaps conservative. (Your mileage might vary) In Twitter’s case, 5000 x 100 = 500,000 sq ft of space that as a lessee they are paying rent on. Most all commercial office space leases are based on an amount per sq foot, say, for a Class B building, $40.00/sq ft. That X 500,000 is the annual gross rental obligation by the renter - Twitter. Precisely $20 million per year! Yikes! What???? You heard right - $20mil - per year - and most all commercial office leases are based on what is known as a 5 and 5 model. THe rent is over a 5 year term, at whatever the base rate is agreed to, and if both lessor and lessee are in agreement, as the first term works it’s way out of year 4, Landlord and Tenant confirm that, if all conditions are mutually agreed to, a second 5 year term will automatically begin at the end of month 60. And, there is the kicker, usually - because the rate for that second term is usually set out before the lease is signed and the offices are initially occupied. For arguments sake, let’s say - because it’s a mathematically easy calculation - the rent in Term 2 will increase by 10%.

Well, after month 60, the lessor has turned over $100million in rent to the Landlord. And is then on the hook for $110million for the second term.  $210million. Gadzooks, Batman! That’s a whack of money!

Now let’s examine the reality consequence of Twitter’s decision to ‘abandon’ the bulk of its leased office space - because, most employees are now working from home. Twitter - or any lessee - is still liable, by virtue of an ironclad lease previously agreed to, to pay the rent on all that empty space. More WOW! That’s a tough pill to swallow. And you can bet that the Landlord is going to fully expect to be paid the rent, regularly and on time. After all, it wasn’t his decision to send 5000 employees home, was it?

Let’s continue. The lessee, at that point, has some options. The first is to meet, sit down with the Landlord (at that time it’s usually lawyer/accountant vs lawyer/accountant) to see if a mutually acceptable exit path might be possible. For fun, let’s say the lease, at that point is at or near month 36 - 60% of the way through its term. The landord has every legal right to expect - to count on, receiving , over the last 24 months, an additional $40million. Fair, right? Of course it’s fair - and legal. But Mr CEO of the lessee company makes an offer to the Landlord, sayin in effect, ‘Look - we’ll exit the space and turn it back over to you within 3 months and will pay you an exit fee. Won’t be $40mil of course. How about $10mil?’

Well, see - the landlord does indeed have a firm grip on the short and curlies of the tenant. And he is under no obligation, legal or morally, to budge by even a dollar. Bujt let’s say they find common ground - let’s say they agree on an exit payment of $15million? Based on an agreement to turn the space back over to the Landlord within 3 - 4 months. Once agreed to the landlord can then seek a replacement tenant - even offer them the space at a deep discount - ‘cause they will have $15million in the bank.

But wait - there is yet another fly in the ointment. All commercial leases provide for an additional scenario. At lease end, if the tenant is in fact giving up the space (for whatever reason) he is legally responsible to demolish all existing offices and facilities, remove lighting, plumbing, etcetera and return the space to what is known as ‘base-building’ conditions. So that the landlord can then show the space to a prospective tenant as completely empty, awaiting whatever  modifications or improvements an incoming tenant may wish to make.

Okay - fair enough. But who foots the bill for the demolition and restoration costs? Why the lessee of course. So on top of paying a penalty of $15million the lessee must then hire an architect to prepare a comprehensive set of plans and drawings that, in detail, spell out all the steps necessary to demolish and remove. Oh my! And guess what? A contractor who specializes in such work will also charge his services at $X/sq ft......hmmmm! Let’s see, X times Y = ohmigod! Yes, it equals let’s  say, 500,000 sq ft X $20.00 - oops! Ah - what the heck! Peanuts - just another million bucks.

Do you get the picture?

Back to Mr Ford. Albeit their 30,000 employees (who, based on the same formula for calculation) will be abandoning 3,000,000 sq ft of space.

Work it out - yes, there isn’t a rental cost - but there is still a whopper of cost. But at least, being as they are their own landlord, so to speak, accounting and financial whizzes can figure out how to claim such space for a tex credit. Maybe. . . . .

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The preceding Ford article along with the other articles that follow (Forbes, CNN, Montreal Gazette) are alarming.
The following is meant as a primer for those who have little or no knowledge of the actual mechanics of commercial office space/buildings.

As stated, it is highly unlikely that office space rentals will return to anything near, what we've been accustomed to understand as normal, for years and years - if ever. Also as noted is the response/reaction by many, not involved in the world of commercial real estate, to offer instant remedies, fixes - suggestions to rectify the situation.

One of the most prominent and most frequently heard is that the landlords should simply convert the vacant and un-rentable office space to residential units. Having broad experience and decades of involvement in both commercial space planning and design, along with residential design (apartment buildings, condos, etc) I decided to undertake a study to show both the awesome complexity of such modifications along with some visual representations as to how a typical office floor might look once converted to residential.

In order to provide a clearer understanding of the difficulties of converting stand commercial office space to residential units (they would most likely have to be rental units)I prepared a spatial analysis/comparative study.

Based on the standard 5' modular spacing in all commercial offices, I developed a typical floor plate for an office building.
This model is based on 20,000 sq ft per floor. The number of floors is immaterial. The plan shows the ground floor so the viewer can understand the main entry, the lobby area, security desk and elevator bank.

Additionally a typical floor is reflected in a plan study with an imaginary tenant occupying about one-quarter of the floor space.
It is shown both unfurnished, and with a suggested furniture plan - only in an effort to convey scale.
Moreover, there is a close-up vied of three units wherein a 'Study/Office' space has been allocated. These are all at the furthest distance from natural light - normally would be considered 'dead' zones, non-usable space. However, given the trend, and the emerging reality, of 'working from home' being more commonplace, the design layout suggests that a resident could maintain that space as both an interior den/library, but also as a space wherein either a visitor or a staff member could enter the premises and directly enter the office/work zone. Otherwise, such deeply remote spaces would be a 'hard sell' to an interested client.

Each square measures 5' x 5'

The ellipse as shown spans across three 'dead zones' of these apartments - meaning they are so far removed from exterior walls that would receive little in the way of natural light.

They are planned in this manner to show that even though considered 'dead' those space can be utilized as satellite home offices.

A proposed layout for a two bedroom unit + Den.

The curved line between the Den and the Dining Area might be a glass wall allowing natural light to penetrate into the interior space.

This study illustrates a possible approach to re-purposing un-rentable space. The cost, however; would be onerous. The infrastructure expenses - plumbing, HVAC, removal and replacement of all ceilings may well prove to render such a solution to be financially untenable. But then, what choice might a landlord have? Surrender his property to the banks, the mortgage holders - or re-finance and invest vast sums in an attempt to restore properties to positive cash flow status.

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NEW YORK CITY HASN'T HAD THIS MUCH EMPTY OFFICE SPACE IN THREE DECADES
by Alison Kosik, CNN Business

https://www.phillytrib.com/news/business/new-york-city-hasnt-had-this-much-empty-office-space-in-three-decades/article_7a80428e-b4a4-56db-a0a6-490f5ddab4ec.html

Updated 3:38 PM ET, Thu April 22, 2021

(CNN)Vacant office space in New York City is the highest in nearly three decades and will likely hit "unprecedented levels" in the coming months.

In fact, Manhattan's overall asking price for rents has declined for the past two consecutive quarters, falling to the lowest price per square foot in three years. But some analysts think that lower rents are not just due to demand, and that costs depend on the situation.
"Landlords have adjusted their expectations and are already being much more aggressive than they were before COVID," said Michael Cohen, president of the tri-state region at Colliers International. "But their specific reactions depend on their individual circumstances. For example, developers of newer office buildings are more likely wait to make deals if they don't want to lower their rents further."

As many companies continue to work from home, data from global real estate services firm Cushman & Wakefield (CWK) shows that the office vacancy rate in Manhattan reached 16.3% in the first quarter of 2021 -- the highest since 1994. That's up from 11.3% a year ago.
The report -- assessing office space in Manhattan -- noted that office space leased since last year has also declined.
Cushman & Wakefield expects vacancies to continue to increase to "unprecedented levels in the coming months." However, the report also notes that rising vacancies will drive asking rents down "substantially."

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OUR AVERSION TO A 'RETURN TO NORMAL' GOES BEYOND JUST THE OFFICE. HERE'S WHY
from Analysis by Allison Hope, CNN

As indoor dining reopened in my town, I watched three 20-something women shriek and gossip over zinfandel in a local restaurant. I was there, briefly, in my N95 mask to pick up my takeout.

It occurred to me in that moment, that for as much as I missed dining in at restaurants, I didn't miss that. I didn't want to be at the table next to loud people, even when their aerosols no longer contained a deadly contagion.There is a chance to resetTo be clear, I want the pandemic to be over, but there are so many things I don't want to go back to. Coworkers sneezing in open workspaces, for instance. Crowded weekend malls. Obligatory birthday brunches. Or cocktail hours of any kind where we have to mingle and make small talk with strangers. One of the silver linings of forced social distancing has been the chance to reset -- to hold close those we consider dear and gladly forgo having to dish excuses to everyone else.

"I never want to go back to what normal used to mean," said Tori Neville, a communications professional who has been working from her Hudson Valley, New York, home since the pandemic hit last year. "I love working from home and not having to do things just to show face. My life is so calm, my anxiety is way down. I'm more connected to my family and to myself. My focus is clearer than ever." Who will go back to packed spaces?
More than 50% of employees don't want to return to office life, according to a recent Pew study. But while it may be easy not to miss rush-hour commutes and ice-cold conference rooms, many have also formed an aversion to formerly enjoyable social pastimes they now just can't imagine going back to.

Andy Humm, an LGBTQ activist and media maker who wrote theater reviews for more than 30 years, can't imagine going back to packed spaces like before. "If we ever do go back -- even if this pandemic is completely over -- I hope that wearing masks in legitimate theaters and movie theaters becomes the rule," he said.
Have some of us who once considered ourselves social butterflies become wallflowers during a year of stay-at-home? Are we, perhaps, more discerning about how we might plan social outings after a year of rethinking how social encounters could harm us?
We know more than ever that our time on this planet is limited, and it's just not worth meeting up with that old college friend we never really liked that much anyway. Or our reward-to-risk ratio no longer values a meal out with raucous patrons at the next table. Some people are more anxious
Some of us are more socially anxious than we were. After all, many of us had more than a year of training ourselves to undo the social impulses we've built over a lifetime: embracing that old friend, helping that old man cross the street, chatting up that colleague after the meeting.

More than a year of avoiding social interactions, though, with masks that make those encounters we do have more awkward, has turned some of us into clumsy oafs who feel more comfortable planting tomatoes in our pandemic gardens than shooting the breeze with an acquaintance at a coworker's retirement dinner. Perhaps we always felt this aversion to social obligations and want to cling to a hermit life post-pandemic.
"Since our social calendar has been limited for the last year, filling it up can feel exhilarating for some yet cause anxiety for others," said Judith Zackson, the clinical director of Zackson Psychology Group in Greenwich, Connecticut. Some people will rush to hang out
Younger people will feel more desperate to reconnect socially, according to Zackson, and will rush to return to the pomp and circumstance of daily routines and social engagements, something she calls a "reverse of confinement."
Older people, however, may be slower to jump back into the scene in order to minimize their risk. The pattern may follow for introverts and extroverts, respectively, with some leaning into their comfort level to stay in and others running with arms wide out back into the crowds.

The pandemic may also have opened up previously undiscovered parts of ourselves, the inner introvert in the formerly outgoing social butterfly, and vice versa.
"Some of my patients who struggled with social anxiety began flexing their muscles of communication during Covid-19," Zackson said. "Being in their own space increased confidence, openness and reflective thinking with different people with different viewpoints.
"This experience gave them a new perspective, challenged their negative beliefs and facilitated the easing back to normal in-person activities while continuing online interactions," she said. Isolation can also lead to social dysfunction
Social isolation, however, can also lead to social dysfunction, as evidenced by multiple studies, including a 2019 study in the The New England Journal of Medicine.

Researchers studied the effects of expeditioners with extreme social isolation in Antarctica and determined that "exposure to environmental monotony and social isolation have deleterious effects on the brain."
One could argue, though, that a new orientation around finding fulfillment informed by a year of pandemic-induced social distancing isn't all negative. If you were a night owl pre-Covid-19, packed into the crowded bars, and now your pleasure-seeking comes in the form of reading a good book alone curled up on the couch with a hot cup of tea or a cold glass of chardonnay, it's not all bad.

If you come out of the pandemic more discerning about how you spend your precious time and with whom, it is yours and only yours to decide. And if wallflower or hermit aren't nicknames you're ready to wear for the long term, just be prepared to put your patience hat on the next time your coworker chews your ear off about last night's ball game at the water cooler.

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From the Montreal Gazette : : May 12, 2021
Office availability rate highest since late 2015 as firms eye smaller footprint
More than 15 million square feet of offices were available to rent in Greater Montreal as of late March. That’s 39 per cent more than a year earlier, at the onset of the pandemic. Author of the article:Frédéric Tomesco

COVID-19 has pushed office availability in downtown Montreal to a five-year high as employers start rethinking their need for physical space.

The most recent quarterly report from real estate advisory firm Avison Young says 12.8 per cent of downtown offices were available for rent at the end of the first quarter, up from 8.8 per cent a year earlier. Availability rates in the central business district haven’t been at these levels since the fourth quarter of 2015, Avison Young said.

Across Greater Montreal, vacancies rose to 14.5 per cent from 10.8 per cent year-over-year, their highest since the third quarter of 2016. All markets saw availability rates increase — including the South Shore, which had so far resisted the trend.

Public health measures making teleworking compulsory since the start of the pandemic have not only emptied office towers of thousands of workers, they’ve led many companies to start crafting a future where flexible work is the norm. As a result, tenants who are relocating now are opting for smaller spaces, according to Jean Laurin, Avison Young’s new managing director for Quebec.

“Unless a company is growing by leaps and bounds, most employers nowadays are capable of cutting their office footprint by 10 to 30 per cent,” Laurin told the Montreal Gazette in a phone interview. “Many service firms are going through this process, whether it’s in engineering, accounting, law or even financial services. There will be a reduction in office space.”

More than 15 million square feet of offices were available to rent in Greater Montreal as of late March. That’s 39 per cent more than a year earlier, at the onset of the pandemic.

Much of that surge is being driven by new sublease opportunities. Offices available for sublease in Greater Montreal have more than doubled since the spring of 2020. They now amount to 2.15 million square feet.

The phenomenon is even more pronounced in central Montreal. About 922,000 square feet were up for sublease at the end of March, more than triple the year-ago total.

Still, the trend slowed during the first quarter compared with the fourth quarter of 2020, and Laurin said he expects it to eventually reverse.

Despite the rise in vacancies, rents have held firm, with many landlords offering incentives such as renovations or rent-free months to avoid renegotiating leases. Property owners are often loath to cut annual rents because that affects building values, which are based on projected rental income.

Average gross rents — which include the cost of utilities — in the central business district stood at $34.33 per square foot in the first quarter, little changed from $34.37 a year ago, Avison Young data show.

“Landlords are doing everything to offer incentives rather than reducing rents,” Laurin said. “It’s about preserving the value of their buildings.”

After a slow first quarter for transactions, Laurin predicts things will start heating up on the deals front as vaccination numbers rise and the prospect of a more normal downtown draws nearer.

“There’s a lot of activity in the market, and I think you’ll see several office-building transactions announced over the coming months,” he said. “All things considered, the economy is doing well. There’s a recovery coming.”