'We Were Way High': Reality Of Phased Office Comeback Falls Short Of Landlord Expectations

Office space has been open in Massachusetts since Phase 1 of the commonwealth's reopening plan went into effect on May 25, but office workers and their managers aren't rushing to return. That doesn't mean they never will, just that the uncertainty is still too strong.

During the early days of the pandemic closures, the expectation was that reopening, when it occurred, would be a series of relatively quick steps up, Oxford Properties Group U.S. Head of Office Chris Mundy said on Bisnow's Boston Office Update: Subleasing, Retail and the Evolving Market webinar last week.

Those steps would begin at perhaps 25% of pre-pandemic occupancy and then move up to 50% and 75%, Mundy said.

"Candidly, we were way high," he said. "There's really been caution among the office tenants in coming back."

In Boston, the current total at Oxford Properties' portfolio is about 5% of pre-pandemic occupancy, according to Mundy, who said the Canadian pension fund-owned Oxford saw similar numbers in New York and Washington, D.C. Rent collection for those offices is almost 100%, however, he added.

Uncertainty is the guiding factor in workers staying away, and it is still weighing heavily on forecasts for office owners like Oxford.

"There's a lot of speculation about what the impact of the pandemic will be, but there's a wide range of [possible] outcomes, so it is hard to make long-term decisions," Mundy said.

Office workers who can work at home have adapted to the new reality, and until the coronavirus pandemic is under control, they don't see any reason to work in an office — and their bosses don't either.

That is true even in a state like Massachusetts, where the number of COVID-19 cases has flattened, as opposed to the spikes in places like Arizona or Florida. In early July, new cases in the Bay State totaled fewer than 100 many days, compared with well over 2,000 new cases per day during much of April.

Also, since mid-April, the seven-day average for the positive coronavirus test rate is down 94%, and the three-day average of hospitalized patients was down 84% Monday, according to the Massachusetts Department of Public Health. Earlier this month, the commonwealth rolled out Phase 3 of the reopening of the state's economy. That phase isn't about office space but allowed some kinds of retail, such as movie theaters and health clubs.

The reluctance to return to office space directly affects central business district retail and restaurants, which need office workers, but also students and tourists, Boston Realty Advisors Managing Director and partner Whitney Gallivan said. Boston is going to have a lot fewer of all of those for an uncertain while.

"Every retailer that we talk to, and every landlord that we speak to, is doing something different," Gallivan said, adding that landlords are trying to keep the tenants they have if at all possible.

"The bottom line is that they're trying to work together," she said. "If you have to refill a vacant space, there's not much activity out there. Some, but not enough to let these tenants go."

Retail rental payment has been between 40% and 60%, with properties leasing to grocery stores and pharmacies toward the upper end of that spectrum, Gallivan said.

Though there are a number of possible outcomes to the current situation, and uncertainty is the norm for now, it is also probably a mistake to believe that all of the adaptations to the pandemic will be permanent, such as a majority of workers working at home full time, Mundy said.

He told the story of a tech tenant whose CEO was considering giving up on office space and going 100% remote, which would have been a loss for Oxford Properties. But it also would have meant a loss in cohesion for the company's workforce, the CEO came to realize.

"The CEO started to share the idea with his senior team, and one of his top lieutenants said, 'That's great, I'm moving to Idaho.' The CEO said, 'I don't know how I feel about that,'" Mundy said, and he rethought his plan.

Different aspects of the pandemic probably will stay, however, especially in the retail world, such as takeout windows or the convenience of having items brought out to one's car, Gallivan said, noting also that online platforms are going to get stronger.

"It may be hard to go back to [having] to walk into the store, take my kid out of the car and go pick this up," she said.

People will want to keep the alternatives they've gotten used to during the pandemic.

Surviving retailers and restaurants will come out of this period a stronger business, Gallivan said, since they will have learned practices that help the consumer.