The head of office brokerage for Kessinger/Hunter & Co. assesses life in a post-COVID world—if we ever get to one.
Q: So you all don’t just broker office space for clients; you have to manage your own in this environment. Is everybody back to work now, and how did you manage things during the work-from-home phase?
A: I think we’ve probably got the majority of our associates back in the building. As
far as what we did in the heat of the pandemic, it was pretty much what the CDC recommended, (we formed a committee who did a great job in researching and getting us set up), they put arrows on the floor to limit flows of traffic, shut the kitchen down, put up Plexiglass around workstations and then basically said you can come and go, but try to keep your distance. A majority of our office space is in private offices, and the cubes we have are older and higher, so it really worked to our benefit. The policy became, as long as you are in your office you can take off the mask, it’s your safe space, but please put a mask on when you come out in the common areas. I think it worked really well.
Q: So how did the work-from-home experience go for you?
A: I stayed home about two weeks, and to be honest, I really couldn’t get anything done. It was horrible and conflicting. We needed to stay out for the safety of our people, but we need to train our newer folks (which is hard to do over the phone or on a video call), and we lean heavily on teamwork and collaboration which are key to our success. Consequently, we initially stayed out to try and set a precedent and then under the new set-up in the office, people started to feel comfortable coming in, so we opened up.
Q: Sounds like you might have run into the same concerns about continuity that we’ve heard from others.
A: Yeah. It’s just really hard to prospect and solicit new business in that environment. You’re making calls and struggling to connect when nobody is in their office. Those clients that were available, gave you that ability to make some progress, but the calls were generally very different. I would be on the phone literally all day long, because those you could get a hold now had plenty of time to visit. That part was kind of amazing. The calls lasted much longer, and I learned a lot about the client as a person instead of just business. I would make eight or nine phone calls a day and because they had the time to talk, that’d be about it. People who would rarely take my call in the past, now were talking. It was really weird and pretty amazing. They had time.
Q: So if you’re making changes like relying more on e-mail than face-to-face, you’ve got some new challenges, right?
A: Without a doubt. I suppose it may have helped us in certain cases because you can cover a lot more bases with e-mail. We wanted to be a resource to our clients regarding how to be safe along with what it might look like when they opened back up! The thing you need to remember about the office market is that everybody is generally on a lease, right? So even though maybe things are really challenging to have all this space with nobody coming to the office, you’re pretty much locked in with a lease. Consequently, you need to plan, because the timing of your lease expiration can limit your ability to act. That timeline of most leases must play out. Sure, you can try to sublease your space, which could be a monumental decision, but that poses a whole host of other questions and issues. Those subleases can tend to over-saturate the market putting pressure on rate and other costs. In the end, it has been a real struggle. I think most decision-makers want to act, but they also do not want to make a mistake, especially one that could have a lasting effect on operations!
Q: Have you seen much in the way of force majeure claims to get out of leases?
A: I know that was the discussion and it made a lot of legal departments take a peek at their leases, but in the end, we didn’t see a whole lot. I think it has to do with how the lease is written and then interpreted. That aside, most companies were looking and planning to come back in late 2020 or early 2021 and during that time on mostly smaller leases, we started to see some good activity. That pretty much died down with the Delta variant, and it pushed everybody back home again.
Q: But overall health of the office market now?
A: Overall, the market is gradually starting to pick up after 18 months of flatness. There have been a number of new leases, where companies have had the luxury of an approaching expiration here and there taking place and companies are beginning to bounce around again. I believe there is still a lot of trepidation around the pandemic and people are really trying to put this period of life behind them. While to many it may not be popular, I know a number of decision-makers who really want to get back to working in the office and a sense of normalcy.
Q: So if some of the COVID metrics keep trending down, do you expect the lid will come off things once this is all medical history, say, the next six months or so?
A: Like a lot of things in KC, I think it’s going to take longer. I think everybody’s evaluating their space, and it really depends on the business and how they are going to do things differently when they come back? I think the fact that we’ve still got a lot of companies that are out continues to create challenges. The start and stop of setting dates for re-opening and continual postponement has really created what I would call “pandemic fatigue.” Many companies have pushed the date out to after the first of the year or indefinitely because they don’t want to set a false expectation for their associates again.
Q: Beyond the deals themselves, what are you observing as a result of those kinds of moves by companies?
A: At the end of the day, and I think there are many decision-makers out there that would agree, it’s very difficult to train, hire, maintain camaraderie, teamwork, collaboration, accountability, and have a sense of culture when you are not together. Human interaction is pretty powerful, especially when you’re trying to sell something or differentiate from the rest of your competitors. All the non-verbal communication that goes on from being face to face is gone. …Out of sight is many times out of mind … bumping into some-
one in the hall can be an overall game-chan-ger—you can’t reproduce that on a Zoom call.
Q: Will the work from home dynamic really become the new normal for many?
A: I would argue—and I’m kind of parroting Sam Zell (founder of Equity Group Investments); he did an interview fairly recently and the article was pretty blunt, and I do echo some of things he said, which is that productivity, from the work at home model, is relatively bleak. While there are some who argue they are getting up, banging the phones and computer all day long, that’s one segment. I know for a fact that there’s a lot of people, that are not working the typical number of hours necessary to be productive. They are, for whatever reason, doing laundry, walking the dog, playing golf, working out, etc. It’s just hard for corporate America to monitor. It just is! They know it and are just waiting for when the coast is clear, and they can gracefully ask their associates to come back to the office.
Q: But the workday model is being changed for many, correct?
A: Absolutely! There’s a certain level of trust that has to be instilled and some companies, depending on the business, may never return. But then again, what were the options? It was work from home or no work at all! You go with what you’ve got. I think a lot of people, now that the pandemic is starting to subside, are trying to figure out, OK, how do we come back? I think what we will continue to see is a gradual process, working two or three days a week in the office, and two or three at home. I might be wrong, but I would gather that within the next few years, depending on the business, people are going to want their folks back in the office for all those things we mentioned.
Q: Speaking of Cerner, do you think the Innovations campus work is going to stop where it is—what, about one-fourth of the original vision?
A: For the time being, yes. Again, they’re not even back yet in their other spaces, and now we’re hearing sometime in January is what they’re talking about. There’s going to be a lot of that. And there are going to be some people who never come back. Their sales force and things of that nature will probably come back and over a period of time they will try to re-energize back to five days a week.
Q: What other changes has this wrought?
A: A lot of people said they’re going to take more space to create more separation. I have not seen that happening. I think what we’re going to see is, instead of doing it that way and taking more space, companies may do some sort of a flex program, where maybe you’re coming in every other day, or maybe three days a week, and someone else uses that space the other days. Everybody’s going to try to figure that out and what is best for their associates. Right now, what most are doing at lease roll time, is downsizing a little bit. Other big companies where we’ve seen relocation have been downsizing pretty significantly, it just depends on the business and mindset.
Q: Does the existing building stock in this market accommodate much of that?
A: In the really high-Class A environment, there’s not a lot. We’re just starting to see this happen. It’s going to take a while. A lot of these newer projects are getting some traction and starting to lease up. We’re seeing CityPlace that Block Real Estate Services is developing out south, Creative Planning’s new development in the similar area getting a lot of activity and starting to fill up. On top of that, we are hearing some rumblings of new development starting to be planned with marketing information, renderings, and conceptual floor plans ready to get a quick start. It is very encouraging for new space.
Q: Which types of buildings might not fare well in that environment?
A: Some of the older product with second and third generation improvements may be slower to lease as tenants move upward in quality as leases roll. Those are older buildings and, in some cases, still considered Class A to a certain degree because of location, but they will probably need to slip a bit in rate to continue to attract tenants. Unfortunately, a lot of money is going to need to be spent in refitting these buildings in order to compete. Cosmetic improvements to lobbies, restrooms, hallways, elevators, HVAC, parking lots, etc., not to mention the actual tenant space itself which will need to occur. With the jump in costs for construction, labor, supply chain logistics, etc., I am not sure the timing could be much worse.
Q: Is that going to push some of that borderline Class A into the higher Class B?
A: Some of that will happen for sure and they will cater to that segment of tenant. It will all have to play out. Uncertainty creates uncertainty, right? While office space is not your biggest cost, it’s certainly one of the top five for most companies. So costs will move some of the properties, who refuse for whatever reason to skip the remodel process, into a lower tier product.