Some Shrink, Others Spread

So what will the office of the future be like in the San Fernando Valley after the coronavirus pandemic has diminished or gone away? Some property managers and landlords contacted by the Business Journal say it is not an easy question to answer. Will tenants need less space, as some real estate professionals believe? Or will social distancing measures stick around post-pandemic as others think and create a need for more space? The first possibility implies lease rates will decline. The second implies rates may increase. So, landlords are extremely interested in the outcome. Mike Tingus, the president of Lee & Associates/LA North-Ventura and who has been in real estate for 32 years, believes many tenants may want more space. He foresees that office space will go back to more separate offices and less of an open configuration that has become so popular in recent years. The reason: workers will demand more distancing, even post pandemic. Tenants are also going to move into buildings that they buy so that they can control their environment better. “There is already been a bit of interest in some of these big blocks of space where a tenant will come in and take a whole building even though they might not need it,” said Tingus, who personally owns 10 properties in California and in other states. “They want to control it so they can spread out.” If a business wants to keep six feet of space around a cubicle, a tenant will need about 2 ½ times the amount of space previously needed, Tingus said. Reduced space? However, Jeff Cunningham, a managing partner at Medical Asset Management, sees a reduction in space by office tenants. “I do believe the office space of the future will tend to be less utilized by the day-to-day worker and act more as a central corporate hub for IT and conference rooms and collaboration space,” Cunningham said. Medical Asset Management owns or manages medical and commercial office space from Los Angeles to San Diego including the Tarzana Medical Atrium, Doctors Medical Plaza in Granada Hills and Sherman Oaks Medical Arts Center. Rents at the firm’s Valley properties range from $27 to $59.40 a square foot per year. Cunningham wonders if life at an office building will return to what we used to consider normal or if it will morph into something else. In the old days, you could have, say, a mortgage broker and there was a desk for every employee and separate offices for those with seniority and everyone would work from 9 a.m. to 5 p.m. But the ubiquity of the internet and the general spread of using apps to do document signing and the like has removed the need for face-to-face contact, Cunningham said, adding “Why get on the freeway in Los Angeles and spend 45 minutes driving each way to work when you can do it all from home?” The coronavirus pandemic has sped up the evolution of the work-from-home trend. And some people will continue to have a fear of getting a virus or will simply want less contact, Cunningham said. “Why do you need to meet with someone face to face when you can do it remotely?” he asked. He expects lease rates will go down in the future as landlords, who desire to keep tenants, lose an upper hand on negotiating. Cunningham said to expect disruption to the office space market generally as existing tenants try to find ways to downsize. For example, if a number of tenants want to shrink and give back, say, 10 to 20 percent of their offices, what will a landlord do with slivers of space too small to lease to anybody else? Further complicating the outlook, Cunningham said, is that different industries will act in different ways in how they use their space. “I think the jury is still out on how companies will adapt,” Cunningham said. ‘Health hazard’ Rickey Gelb, owner of Gelb Group – a Family of Companies, a Woodland Hills owner of office and retail properties in the San Fernando Valley, agreed that health considerations will factor into the office of the future, especially from the employee angle. “They will come back and not want to be in the little cubicles anymore,” Gelb said. “It is health hazard anyway to be so close.” There are a lot of variables at play in the office market as no one knows what the true operating overhead is going to be or how rents are going to fare, Gelb said. If voters approve what’s called the split roll (a ballot measure to require commercial and industrial properties to be taxed based on their market value, rather than their purchase price) or state lawmakers pass Senate Bill 939 that allows businesses to just quit their leases, that will hurt a lot of landlords, especially those who own shopping malls with retail and restaurant tenants, he added. “A lot of landlords who have put a lot of money into tenant improvements are going to walk away from a lot of money,” Gelb said. “We have some tenants where we spent $500,000 to get them going in business and they decide if they can go someplace cheaper they will, or go out of business.” Amenities in office buildings will still be important as a way to attract tenants and to separate a property from the competition. If a property owner expects a tenant to take on more employees in more space, then they will have to spend on amenities, Gelb said. “It all depends on the price,” he added. “If they price themselves out of the marketplace, people will go back to where they serve themselves and save some money.” Cunningham said that amenities such as coffee bars have become passé in office buildings with the rise in popularity of Keurig coffee machines. At the Tarzana Medical Atrium, his company put in showers and lockers and outside in the parking garage there is short term bicycle parking and long-term bicycle storage. “It is only valid for 2 percent of the workforce, but it is good marketing amenity,” Cunningham said of the space for keeping bicycles. A required amenity by the city is of a transportation hub in the main lobby consisting of a touch screen directory to look up Metro rail and bus lines and to also show traffic on the freeways and surface streets. The city requires this as part of the traffic mitigation obligation for new development, Cunningham said, adding that his company is also putting the touch screens in older buildings it owns or manages. “If you have a 50,000 square foot building or bigger and you’re trying to compete for tenants and wanting to keep your rents up you’ll be wanting to put in that system,” Cunningham added. But in these times of the coronavirus outbreak the best amenity may be a clean office building. As a property owner, all you can do is create the best, most sanitized environment possible, said Tingus.