Dror Poleg on Post-Pandemic Office Demand

Dror Poleg, author of the book Rethinking Real Estate and co-chair of the ULI New York Real Estate Technology and Innovation Council, researches technology’s impact on buildings. A former property and technology executive in the U.S., the U.K., China and Australia, Poleg is also an adviser to global multibillion-dollar companies in finance, insurance and commercial real estate. Commercial Property Executive recently interviewed Poleg about the future of office space and office demand.

READ THE DIGEST

As COVID-19 continues to rage in the U.S., many offices, particularly those in dense urban areas like New York City and San Francisco, are still nearly empty while employees work from home. What are your predictions for post-pandemic office demand?

Dror Poleg

Large cities are already lagging behind smaller ones in terms of the percentage of people who are back at the office … That said, pre-COVID office demand is never coming back. A large minority of employees and companies will adopt more flexible schedules. Most of them will still rely heavily on offices, but for fewer hours, and, in some cases, in different locations and for different purposes. So while there will be plenty of demand for office space that space will have to be designed, marketed and accessed in new ways.

What is your forecast in terms of space per employee?

Average space per employee in 2020 was higher because employees didn’t go to the office, those who went to the office were in smaller cities which are less dense to begin with, and the only people who went to the office are those who had no choice. This doesn’t tell us anything about the post-COVID world. Ultimately, if it is not safe to go to the office and interact with people, people will avoid the office altogether. If it is safe, the last thing that will attract people back would be to offer them a worse experience than they had before COVID-19.

Many more companies will shift to hoteling/on-demand space programs after the pandemic, which means permanent space per employee will be lower, but the amount of space each employee uses when they’re actually at the office might be higher.

Will older office stock see a decline in demand as employers look to newer office properties that may have more space, better HVAC and more outdoor amenities, etc.?

Many older buildings were in high demand over the last decade because they have more character, are located in more vibrant communities and offer better value to many types of tenants. Many of these also have advantages that are unique to the COVID-19 or post-COVID-19 era, including operable windows, smaller floor plates and the ability to easily walk in and out without using the elevator. Many of them are also priced and structured in a way that makes it easier to revamp their HVAC systems.

Large, new office buildings often have inoperable windows, are completely dependent on elevators, and have expensive and complex systems that are costlier to change. All this is not to say that new buildings are doomed. But landlords should not be complacent and assume that bigger or newer is necessarily better.

As for other uses, older buildings are also easier to convert, but this is always complicated and seldom makes economic sense. However, cities are now looking to incentivize such conversions so we’re more likely to see more conversions over the next few years than we have over the past couple of decades.

If more flexible or hybrid work schedules become permanent after the pandemic, what will that mean for office demand and the type of office space needed, particularly in big cities?

As I wrote in my book, long before COVID-19, “the office of the future is not a place, it is a network that allows the individual to access a variety of locations that enable the task at hand: Recording a podcast, hosting a client, doing focused work, learning or collaborating. Most of them will not be at home.” Landlords should think beyond the box and offer customers a complete solution that enables them to provide such an experience to their employees. In practice, it means many landlords will have to partner with new types of operators such as Convene, WeWork and others.

 Will co-working continue to thrive?

Traditional office buildings will continue to attract the bulk of office users. But we will see more workspaces pop up in repurposed retail spaces, within hotel and multifamily projects, and in non-CBD office buildings closer to residential areas—even within cities.

One of the trends we’ve been seeing in recent months is short-term leases. Do you see that as a permanent shift?

We’ve already seen that even the largest office occupiers are happy to shift a percentage of their portfolio to flexible operators. Latent demand for flexible real estate has been growing for decades. The only reason it did not materialize was a lack of supply: Companies signed long leases because they didn’t have a choice. Today they have a choice. 

Prior to the pandemic, there had been a growing trend of movement out of big cities to smaller cities, and the trend continues. What does that mean for office and urban densification going forward?

Many people will continue to value what cities have to offer. The difference is that people who want access to good jobs are no longer forced to live in the largest cities. The fact that they have a choice means cities will have to compete for individual talent like never before. Offices and cities are becoming consumer products. They can no longer take their customers for granted. This creates an incredible opportunity for developers and operators to pull ahead and extract more revenue per square foot than ever before. But it also means that those who try to stick to the old model of one-size-fits-all will fall behind or find themselves competing with each other on price, in a race to the bottom.

This interview was edited for length and clarity.

Read the March 2021 issue of CPE.