Office Amenity Wars Are Out. Flexibility, Short Commutes, Cool Neighborhoods Are In

As the onset of the pandemic drifts further into the past, its impacts on the way offices are used are still heavily impacting the present. 

The five-days-a-week office schedule is dead. More than 1B SF of office space is expected to be obsolete within seven years. And any employer or landlord who wants workers back at HQ has to reckon with a list of priorities that is vastly different from before.

“I think the jury’s totally out on whether or not any of these amenities matter one whit to tenants, particularly in New York,” Related President of Office Development Philippe Visser said at Bisnow’s New York Office event on Tuesday. “If anyone’s traveled outside of New York, there has been amenity wars for years, and they've done absolutely jack shit for the buildings.”

Despite a 30% decline in leasing in Manhattan during Q3 compared to last year, tenants are once again signing leases, owners said at the event, held at 2 Park Ave. in Manhattan. But the buildings where owners are receiving the most interest aren’t necessarily the ones with a full suite of amenities.

Buildings closer to mass transit options have seen a huge amount of activity, Cushman & Wakefield Executive Managing Director Kevin Kelly said. The brokerage conducted a study using cell phone data and found that office properties within 10 minutes of mass transit had 88% of the traffic than prior to the pandemic. Offices more than 15 minutes away were at just 44% of their pre-pandemic levels. 

“If you really try to strive for five days a week, the emphasis is on being close to public transportation to minimize commute time,” he said, adding that commute time has typically been the biggest factor employees consider when thinking about returning to in-person work.

For office tenants who would rather lure than force employees in the office full-time, they should be more focused on the neighborhood the office is in rather than the amenity program at the building, Kelly said.

“If you're looking to get people in two, three days a week, maybe you're more focused on a vibrant area that creates more of a community that has more opportunities for people to do something after work,” he said.

Being in a good location means tenants care less about the amenities in the building itself, Visser said. High-end financial tenants don’t necessarily care about amenities, he said.

“They don't want their people hanging out in a touchdown space, they want their people to be there at their desks working and trading and making them a ton of money,” he said. “If anything, the best amenity in that building — or in that area — is just a killer restaurant.”

The most sought-after tenants are more willing to pay top-end rents, and they’re more focused on good amenities nearby than in their buildings, he said. KKR expanded by more than 200K SF in Hudson Yards earlier this year and has internal amenities, like a cafeteria and conference centers, but the private equity giant wanted brand-name offerings nearby for its employees.

“They want the external entities of a place to be able to go to, a big flagship Equinox gym, or go to Mount Sinai Health Center. Those are the things they care about,” Visser said. 

There is also a large class of tenants that want amenities and don’t have the money to build them out, which is where office owners can see a return on their investment if they are creating amenity centers, he said. 

“I think those are very helpful to folks and, I think, probably worth investing money in,” he said. “The things that try to create a buzz and try to replicate a WeWork, I think the verdict’s out whether or not that's effective.”

Amenities are making some difference for Brookfield Properties, the firm’s executive vice president and director of leasing, Duncan McCuaig, said. Vacancy rates in NYC trophy office properties are roughly half the overall vacancy rate — hovering at 11% compared to somewhere between 19% and 22%, he said.

“Any building that we're redeveloping, any building that we're building, we're trying to push beyond a Class-A classification and actually make it a trophy asset,” he said.

The amenity debate is a Catch-22, Silverstein Properties Executive Vice President Lisa Bevacqua said. Even if amenity suites aren't the draw for tenants they used to be, it’s hard to get companies to consider buildings without them.

“You're not even getting a tour list unless you have all the amenities and you've upgraded all of your Class-A buildings anyway,” she said.

In an environment where tenants have so many options, that reality puts landlords in a tough spot: If they have debt maturities coming up, they need to hit certain occupancy levels to score new loans, which effectively means investing in amenities and knowing that they may soon be dealing with a more expensive loan to pay off anyway.

“It’s incredibly difficult,” she said. “We're just trying to stay alive here for a couple of years, because I do think it's going to take some time.”

But while the importance of location as a commuter destination or a fun neighborhood depends on the individual tenant, the most common difference in leases from before the pandemic to today is flexibility. The days of a 10- to 15-year lease as standard are over, Mintz attorney Jeffrey Moerdler said.

“It used to be location, location, location,” he said. “I now say optionality, optionality, optionality: expansion options, but also contraction, or options to shorten the term lease for an early exit.”

Lease flexibility has become crucial as a tenant looking for office space options, said Trupti Patel, senior vice president of real estate at media conglomerate Paramount Global.

“I don't think we're ever going back to five days a week, but I do think it's a pendulum, and it's going to swing — it's just a question of when and how hard,” she said. “I think that the landlords are willing to talk to us about what we can do for you, in terms of upsizing, downsizing, providing that flexibility. That’s a key driver.” 

But tenant uncertainty over the length of lease they’re willing to commit to, because of fears that they may lose workers to competing employers if their return-to-office mandate is too strict, is generating difficulty for landlords nonetheless, Rockrose Development Director Ted Traum said.

“Unfortunately, when you piece this all together, you create a fair amount of paralysis,” he said. “Paralysis around leasing, paralysis around investment decisions, I think for lenders ... there’s some confusion and paralysis around establishing value.”

Still, after three and a half years of uncertainty, industry players say the office market may be reaching the bottom. All that’s left is for owners to start tapping into the rescue capital that’s in the market, JLL Senior Managing Director for Capital Markets Jeremy Neuer said. 

“I was on a national call last week and commentary was institutions are back and investing in San Francisco,” he said. “If we've hit bottom, we might stay there and drag along the bottom for a while, but we’ve seen the bottom.”