Christopher Jerjian saw it.
Five years ago, he looked at the margins and the work needed to steal tenants away from other landlords and decided to get out. He would leave the real estate brokering game before the market became too difficult to navigate and impossible to profit from.
It was something of a radical decision, since at the time occupancy was near 100 percent throughout the Philadelphia region. Construction was booming, and businesses were expanding. Opening. They weren’t contracting. Right?
Not according to Jerjian. He had started to see a trend, and no matter how high the stock market went or how rosy economic predictions were, things would be soon trending in the other direction.
“There wasn’t enough demand,” he says. “The phone would ring, and someone would ask for a smaller space.”
In 2016, Jerjian began Mt. Laurel-based Kiwi Offices, which provides modest offices for companies that don’t need amenities. Kiwi offers finished, ready-to-move-in space with internet and conference room availability. It allows companies to blend in-person work opportunities and remote capabilities in a hybrid that provided what companies needed and nothing else.
Christopher Jerjian. Photo courtesy of Wolf Commercial Real Estate
“For a lot of people out there, that’s all they want,” Jerjian says.
Things were going well. Then came the pandemic. Now, Jerjian and Kiwi appear to be in a tremendous spot, as months of working from home by employees all over the area and the world has started to convince companies that their office requirements might not be so robust. When the pandemic abates—however it abates—the return to work will feature a variety of circumstances that will be different than what prevailed in March 2020.
One of them could well be a significant drop in the need for office space. As companies have discovered that they can get plenty of productivity from employees working from home, they could welcome the return to normalcy with cuts in their in-person footprints and requirements. Jerjian could well profit, but developers and brokers may be facing a climate that features lower rents and trouble meeting construction debt payments, thanks to a suppressed demand. Think about a company with a large sales force. Since many of those folks are on the road quite often, they don’t need specific offices at the main headquarters. They can handle a lot of their administrative duties from home and come into the home office for sales meetings and some client connections.
A September article in The New York Times reported that “demand for office space has slumped,” as companies are less likely to follow through on expansion plans and those who are signing leases are inking shorter-term deals. Experts believe the rebound could take a long time, and veterans are remarking that the climate is unprecedented. “It has never been turned upside down like this before,” Robert Ivanhoe, a real estate lawyer. Granted, Philadelphia is not New York, but if the financial capital of the nation—and, many say, the world—is experiencing problems, it makes sense there are similar issues here.
Dan Mayock, a 30-year veteran of the real estate wars who just started a company—Real Property Opportunities—that will purchase and rent apartments, notes that the concept of working from home has “rubberbanded” back and forth ever since the internet became widespread. After the coronavirus quarantines and subsequent long-term shutdowns, that band could snap.
“What has become a viable and likely scenario is the ‘office hotel,’” Mayock says. “People walk in and sit in a cubicle in the office and set up to work. There are no names on the cubicles, and you are just in there for a couple of days each week when you need to see people and meet with people. The other three days of the week, you’re home.
“It’s a great set-up, as long as the WiFi doesn’t go down in the house.”
This is not at all to say that every company in the area will be downsizing its footprint, encouraging employees to work from home and buying Zoom’s premium packages. Plenty will still have significant space needs, and many different industries rely on the larger, more impressive office to give customers a sense of professionalism and security. Law firms qualify, although Jerjian reports that they are often clients of Regis, which offers a service similar to Kiwi Offices but with a receptionist and other limited accoutrements.
But as companies investigate their needs moving forward, there will be some changes. Some big changes. Bill Luff is the founder of CRE Visions, a commercial real estate consulting firm. He looks at the coming market as being impacted by the pandemic not just in terms of space but also in terms of design and other features that will attempt to help provide a healthier environment for workers.
Luff believes that even if a company wants to cut its in-office workforce by 20 percent, it may need the same amount of square footage, because it will provide more room per worker, as a lingering effect of the social distancing protocols and understanding of how viruses spread through transmission of particles through speaking, coughing, sneezing. etc. If a business allotted 175 square feet per person before, that number may swell to 220 in the future.
As offices are reconfigured for new tenants, rehabbed by owners or constructed from the ground up, the idea of “healthy buildings” will grow. HVAC systems will be designed to whisk away air and to keep a good flow. More lighting systems will respond to motion, rather than touch. There could be elevators that don’t stop at multiple floors and focus on transferring a smaller number of riders to one or two floors at a time, with minimal button-touching. The goal is to give businesses and their clients a greater sense of security and the understanding that they are getting space that will help foster productivity without any health detriments.
“Developers are focusing on more healthy buildings,” Luff says. “One of the prominent builders has been saying it has the healthiest building in town.
“Technology utilization will grow like never before. Owners and their tenants will be looking for convenience and health in all things.”
And then there is retail. A variety of factors, not the least of which is the ever-growing boom in online shopping, has caused retail businesses to change their focuses, and in some cases, close. Some malls have recast themselves as town centers, with mixed-use personalities that include residential, office, open space, restaurant and shopping options for those in the area.
“Retail is a big question mark,” Luff says. “It was a big question mark before the pandemic. With the shift from brick-and-mortar stores to technology, it’s a real crapshoot. People think they know what’s going to work, but they don’t know what’s going to work.”
One of the problems retailers face is getting people to return to their sites for future purchases. For instance, clothing stores may attract a customer a couple of times, but once that person gets a feel for style, inventory and fit, he or she may feel comfortable enough to migrate online.
Jerjian believes retail “has been in trouble since the death of malls.” And that terminal condition is due to a narrowing of the possible tenant categories. Experiential products and chain restaurants can’t fill all the space. And who is waiting to grab any open area? Companies like Amazon. And if a landlord happens to have a property that can handle the loading and unloading of materials onto trucks, it has no problem finding tenants.
“Anything with a dock is killing it,” Mayock says. “If the building is dry, has a roof, can bring a tractor-trailer in and can break down palettes into smaller amounts for home delivery, it’s going to be popular.”
So, like so many difficult times throughout the American economic history, there will be winners and losers because of the pandemic. When it comes to real estate, expect a shakeup, but as always, businesses will be looking for opportunities in the form of greater technology, lower rents (in the short run) and better location. It may take some time, but eventually, the market should adjust and rebound.
“I don’t think there’s going to be a major disruption—provided the pandemic ends in 2021,” Luff says.
That’s a completely different story.
