Will Downsizing Be Big for Long?

When insurance giant Nationwide announced in March that it would shed thousands of square feet of office space while not losing employees, it seemed like an extreme downsize. But the pace picked up. Tech giants Facebook and Alphabet-owned Google sent huge portions of its personnel home to work remotely. In July, financial services firm B. Riley Financial announced it had forfeited its Warner Center office and signed a 10-year-lease for a smaller 18,000-square-foot space in Westlake Village, according to brokerage CBRE Group. As NAI Capital Executive Vice President Scott Martin explained, it’s all about space utilization. Company executives ask: “How many of these guys can work from home? Do I do a mobile work force? That is what we’re seeing now.” The coronavirus-impacted second-quarter figures underscore why such downsizings have become more common. While demand for industrial space and housing may keep rising, the Allen Matkins/UCLA Anderson Forecast predicts that demand for office space will continue to drop in the next three years in Southern California. According to Savills Inc. data, the pandemic has taken huge toll on office leasing in Los Angeles County in 2020 as activity plunged 52 percent in the second quarter from first quarter. With unemployment in the double digits and tenants reimagining workspaces, the brokerage found that only 1.9 million square feet of deals for new leases, renewals or lease expansions were signed in the city of Los Angeles during the second quarter — the smallest total of space since the Great Recession. As tenants across Los Angeles County are trying to downsize to save on costs, available sublease space exploded in the last quarter from 1.1 million square feet to a record 6.1 million square feet, according to NAI Capital figures. NAI’s data also concluded that new leases and investment sales had slid way down. A nearly 60-percent drop of new leases occurred from April through June at 1.8 million square feet. Only 1 million square feet of investment sales closed — a 55 percent dip below first-quarter figures. B. Riley’s new Westlake Village location, a BentallGreenOak-owned property at 30870 Russell Ranch Road, appears to have been a downsize. Back at 21255 Burbank Blvd., B. Riley had moved to Woodland Hills after it had acquired liquidator Great American Group in 2014. According to CoStar data, Great American Group occupied 24,689 square feet at that Woodland Hills location. Thus, B. Riley has seemingly shed more than 6,500 square feet by relocating to Conejo Valley. “Moving from Woodland Hills to Westlake Village helped the client achieve substantial savings,” said CBRE’s Matthew Heyn, who represented B. Riley in the transaction, in a statement. A spokesperson for B. Riley had no comment. “It is hard to say right now if the downsizing of office space is here to stay,” said Newmark Knight Frank Executive Managing Director Ryan Harding. “On one hand, working from home will be part of our future. On the other hand, social distancing and creating healthy spaces for employees will also be part of our future.” Experiment that worked A funny thing happened for many businesses as they hastily adapted to the work-from-home orders because of the pandemic: The experiment worked. Companies found themselves saving substantial amounts of money each month by not having to reimburse workers for expenses or pay for their parking. Workers who had been commuting long runs on traffic-saturated throughways, found they could devote more time and energy to their work without office distractions. Despite some gestures toward space reduction, NAI’s Adam Comora told the Business Journal in July that he has yet to see some isolated moves turn into a real movement. “I’m not seeing that with a lot of my clients (but) I see that as coming down the pipeline,” Comora said. Rather than downsizing physical office space, he continued, right now companies are downsizing staff in the office by sending employees to work from home. “They are totally rethinking what their office needs are going to be, but they still have terms left on their lease,” he said. NKF’s Harding echoed Comora’s sentiment. “Of the 250-plus companies we represent throughout the country, including the San Fernando Valley and surrounding areas, not one has told us they are giving up their office entirely with the intention to go completely remote,” Harding said. “While we believe there will be future downsizing by companies in other industries not doing as well, we have not seen this come to fruition just yet.” If anything, Harding noted, some local companies have gained square footage. “We are currently working on several expansions in the San Fernando Valley by companies in industries doing well throughout the pandemic,” he said. Yet anecdotally, some companies that saw their lease reach its end in 2020, such as Glendale-based Datastream IT, have realized that forced remote work during the shelter-at-home orders had become a better solution than renting office space. “The realities are that the majority of occupiers of office space in this (Valley) market are all small companies,” NAI’s Martin said. As Datastream IT’s owner Louie Sadd told the Business Journal, his employees were sent home in mid-March and neither Sadd nor his staff at the time realized that it had become the last time they would ever visit their 25,000-square-foot Glendale office space at 330 N. Brand Blvd. again because Sadd ultimately decided not to renew his five-year office lease when it expired June 1. “This was directly related to the virus crisis,” Sadd said. “Like most California businesses, we shifted to work from home when the California orders were issued.” By not renewing the lease, Sadd believes he will be saving some $75,000 a year in rent and attendant parking fees. The savings has enabled him to give each of his 15 employees a $1,000 stipend toward their home office set-ups to adapt to working remotely. “We wanted safety to be priority for our team,” Sadd said. “After a few weeks, the team was enjoying it, the productivity was trending upward.” Plus, employees were saving time, stress, and money by not commuting to the office. Should Sadd had signed on for another five years, it would have resulted in reconfiguring his business’s bullpen environment and the fiscal burden of tenant improvements “would have fallen 100 percent on us,” he said. Sadd believes that because his team is younger — in their 20s and 30s with less familial attachments and financial responsibilities and comfortable communicating online — his company was able to make a relatively easy jump from tower suite to home office. He added that his hires are responsible and there is no sense of having to police his workers. If anything, he said, they’ve become more productive working from home. Plus, company members who are parents — like Sadd, who has a 2-year-old — can work from home and watch their kids, especially during this period when schools have been forced to stay closed. In fact, Sadd admitted, there were already pangs and hints that Datastream IT was going to move in this direction even before 2020 with a flexible Friday which gave employees the option to work remotely. If there is any element of going reductive that Sadd laments, he said it’s the fact that “as we hire on team members is how will they get to know our corporate culture” as the new hires — he will be bringing aboard two new team members soon — miss out on that collaborative bullpen environment. Yet Sadd said that such comradery will be easily remedied once the virus subsides with staff gatherings at second-office locations like conference rooms, restaurants, or coffee shops. “I have a strong premonition that this will work,” Sadd said.