Tens of thousands of people around metro Phoenix now work from home because of the COVID-19 pandemic, and it’s still uncertain when, or whether, most will return to an office setting.
Does this portend a permanent shift in work arrangements, along with long-term deteriorating of office properties in downtown Phoenix, Tempe, Scottsdale and elsewhere around the state?
Probably not — but there will be changes, say local industry experts. Many voice optimism that office settings will remain attractive to employers and the people who work for them, with metro Phoenix positioned to recover better than many other large U.S. cities.
“If you want to grow, expand, onboard (new employees) and continue your culture, those are things that all happen in an office,” said George Forristall, director of real estate development for Mortenson. Over the long haul for many businesses, “an office environment at some level will be required.”
Speculation down, vacancies modest
He and other development and leasing experts who participated in a discussion sponsored by the Greater Phoenix Economic Council anticipate office properties, especially high-quality buildings in desirable areas, will recover once a COVID-19 vaccine is developed and distributed and health authorities relax social-distancing requirements.
Even during the pandemic, many companies continued to announce office-focused expansion plans for the Valley, including Amazon.com and Zoom.
Demand for office space by employers hasn’t ended but, rather, is on “pause,” said Scott Baumgarten, a senior vice president at Transwestern Development, and another speaker at the GPEC virtual event.
Office vacancies around metro Phoenix have risen only slightly during the pandemic, and prices are actually a bit higher, he said. Landlords continue to collect rents too.
More than 96% of rents on office properties nationally were collected in July, according to NAREIT, a trade group that represents large commercial owners known as REITs, or real estate investment trusts.
That was up from around 93% in April when the pandemic really took hold and was well above rent collections in beleaguered real estate sectors such as shopping malls.
It helps that the metro Phoenix office market wasn’t overbuilt going into the pandemic, without a lot of vacancies or unoccupied speculative building. The Valley’s current office vacancy rate, 12.5%, isn’t much above last year’s low of 11.4%, according to GPEC. However, an occupancy drop in the first quarter snapped an eight-year run of positive absorption, said Thomas Maynard, a GPEC vice president for business development.
Other factors that could help the metro-Phoenix office market rebound include a lower cost of living here compared with many other large cities and a growing workforce. Nor are Phoenix-area commuters as dependent on mass transit as those in many other big cities. Bus and light-rail ridership has dropped sharply during the pandemic, partly because of reduced commuting needs and partly because of health concerns.
Office settings still important
As frightening as the coronavirus pandemic has been for many, it’s not the first perceived threat to office properties. Following the 9/11 attacks on the twin World Trade Center towers, many people expressed fear about ever returning to tall buildings but they did, noted Rodney Riley, director of acquisitions and development at Caliber.
Still, some employers have cooled to office environments. Outdoor-goods retailer REI recently sold its new campus near Seattle, for example, and Pinterest spent nearly $90 million to break a lease on a San Francisco property.
But those examples remain much more the exception than the rule, development officials say. Facebook already plans to snap up the REI complex, for example.
“Most people get their socialization at the office,” whether it’s from finding friends or future spouses or forming informal sports-betting pools, Riley noted.
Office environments also are places where many people work better, Riley said, describing the current situation as the “great work-at-home experiment.”
“At some point, we’ll have enough of kids interrupting you when you’re in the middle of something important,” he said.
Then again, not everyone will want to return to office work for reasons ranging from long commute times to lingering virus anxiety. And with laptops, videoconferencing and other tech applications more widespread than ever, they might not have to. The GPEC virtual meeting didn’t include any office-property skeptics.
Shaping offices of the future
Regardless, there likely will be changes ahead. For example, more employees might work in shifts — alternating days when they go into the office, for example — and there could be configuration changes such as situating workstations farther apart.
Technological enhancements such as more and better videoconferencing options also could shift the demand for space, possibly for the worse.
It’s still early to predict accurately how all of this might play out.
That said, the developers and leasing officials who participated in the GPEC conference were solidly optimistic that the basic office model won’t change significantly.
“Work from home has always been an option for companies,” said Cullen Mahoney, a vice president at Trammel Crow.
But employers hadn’t relied on it much before the coronavirus outbreak because of the socializing, mentoring, collaborating and other benefits that an office environment can provide.
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