Signature Associates

U-Turn Permitted: Companies Rethinking Office Abandonment After RTO Mandates

Posted By: BISNOW on August 29, 2023.  For more information, please click here to read the source article.

With more businesses implementing return-to-office mandates and adding more teeth to those they have in place, some of the country’s best-known companies are doing something large enterprises don’t like to do: They’re reversing course.

It’s not the full-fledged return to the office that many landlords and brokers have in mind as they mark the fourth Labor Day weekend — annually pointed to as a date by which workers will come back to their desks — since the pandemic cleared out offices in early 2020. It is instead a trickle of companies that abandoned office space in the last few years changing their minds.

“At a macro level, we’ve seen office shrinkage over the last four quarters, but when you get to the micro level, companies may have shrunk their portfolio too quickly or specific offices too much, and they’re now rethinking how much space they need,” Cushman & Wakefield Global Head of Occupier Insights David Smith said.

AT&T came back to the exact same Atlanta business park it vacated as part of a cost-cutting effort that saw it give up 2.5M SF of offices. The telecom company signed a lease for 120K SF at 1277 Lenox Park Blvd. in Atlanta’s Buckhead neighborhood just two months after CEO John Stankey announced the company would require 60,000 managers to return to their offices three days per week. AT&T didn’t respond to a request for comment.

Although the lease represented a U-turn for AT&T, it was also a consolidation, with the company announcing that it would reduce its footprint in places where its presence was smaller, like San Ramon, California, in favor of creating hubs in Dallas and Atlanta.

This, too, is a trend playing out for other companies as they seek the right balance of office space to meet the needs of a hybrid workforce.

“We also see companies consolidating and saying, ‘We had all these locations, let’s focus on a handful of markets, and in those markets, we’re going to need more space,’” Smith said. “Because they’re really going to have people start to come back in four days a week.”

Even in struggling San Francisco, examples have emerged of companies thinking twice about giving up their offices.

Snap is reportedly seeking 30K SF in downtown’s Levi’s Plaza just nine months after bailing out of a similarly sized office space in the area, citing cost restructuring and an increasing acceptance of remote work for employees.

In November 2022, the Snapchat parent company started requiring employees to return to the office at least four days per week.

Also in the Bay Area, data storage company Snowflake is reportedly looking for a space that could exceed 200K SF just two years after it moved out of its Silicon Valley headquarters.

“Some of the space-need projections from two-plus years ago were unfortunately off the mark, and those realizations are now coming to the forefront,” T. Dallas Smith & Co. principal Corey Ferguson told Bisnow in an email.

Some big companies require less space and a more rightsized footprint conducive to culture-building and collaboration, he said. But they are also taking the opportunity to offer what employees might want, which in some cases means more square feet per person.

“We have one larger user that … at one point had thought that they were going to be downsizing post-Covid,” Avison Young principal Dustin Devine, a tenant rep specialist in the company’s Houston office, told Bisnow.

The tenant in question was in a space in the 60K SF to 100K SF range, Devine said, declining to disclose further details.

“But through programming, they have determined that rather than having any sort of open layout within the office, they want every employee to have private offices so that everyone has a designated space,” Devine said.

Providing private offices for lots of employees takes more space than the pre-pandemic open floor plan trend. In the end, Devine’s client will maintain an office footprint roughly the same size as the one it had when due diligence began.

The main argument for returning to the office is the value in having employees together, being able to foster the culture they want, and being able to mentor and develop young talent, which is hard to do remotely, Devine said.

That cooperation, plus a strong sense of identity connected to the Boston area, is what drew mobile payment company Toast to a 102K SF space in the Fort Point neighborhood after exiting about 130K SF, including its headquarters near Fenway Park, earlier this year. Toast’s exit, which came five years ahead of schedule, cost it $16M in early termination fees.

“Finding a new headquarters in Boston with flexible spaces to support our growing business and our collaborative way of working was essential in our decision-making process,” Beth Choulas, vice president of global real estate and workplace experience at Toast, said in a statement.

Of course, after years of subleases flooding the market, climbing vacancy rates and leasing velocity slowing to a crawl in some of what were the country’s hottest markets in 2019, the office market still has plenty of recalibration to do.

Market fundamentals are hard to deny. The country’s office vacancy rate hit 19.2% in the second quarter, according to Cushman & Wakefield, which forecasts the rate will keep rising. Companies leased 289M SF nationwide in the four quarters ending June 30, down 24% compared with the same period a year earlier.

Then there is the effectiveness of return-to-office mandates, which now cover some 1.7 million people, according to a JLL study. Data tracked by Kastle and Placer.ai suggests that even with those mandates in place, office usage hasn’t increased much.

The few reversals of onetime office defectors haven’t yet appeared in the data, according to CBRE Research Global Head of Occupier Thought Leadership Julie Whelan, but she expects more companies will begin reconsidering.

“My gut tells me that we’re going too far and that many organizations that have really cut their footprint that are now pushing to get employees back on a more regular basis are going to find themselves without enough space to keep their employees happy,” Whelan said.

What drives tenant demand is whether people are coming back to the office, Whelan said, adding there is a lot of discussion as to whether demand has reached a “steady state,” or a stabilization of demand at relatively low levels.

“We wholeheartedly believe that it has not,” she said. “But what’s been happening is the tenants in the market have been hanging in there. They’re looking for space, but they’re not really pulling the trigger, and that has caused our leasing activity to go down. The reason for that is because we’re in an uncertain economic environment.”

That could change quickly should there be more clarity about the economic situation, Whelan said.

“When organizations feel they’re on more stable footing, I believe that there will be a rush of tenants who were not ready to pull the trigger before, and then all of a sudden they’ll be ready to do it,” she said.