The Plight Of Office Will Mean A Flight To Quality Ushering Recovery

San Francisco’s office market is still reeling from the effects of the coronavirus pandemic a year after its onset. But if past cycles are any indicator, catering to tenant needs with higher-quality office product will be a hallmark of the recovery, industry players concurred at Bisnow's The Future of Office in San Francisco webinar on March 25.

“We are seeing a little bit more activity than we have seen over the past year,” The Swig Co. CEO Jim Carbone said at the webinar. “I do think that with every cycle like this, as you start to come out of the cycle — and I think this is either my sixth or seventh cycle that I've been through — you do see that immediate flight to quality. I do think this year will be a little different because the flight to quality can mean different things to different tenants."

A central theme of what will likely bring tenants back to offices in S.F., as in other cities, is implementing healthy building measures that offer safer conditions within offices, particularly measures addressing viral contagion.

“We spend about 90% of our time indoors, and that's probably increased now during the Covid time period. So this has been a priority for our tenants and a priority for us as developers — delivering buildings that they want to be in,” Boston Properties Development Manager Christina Bernardin said at the webinar, adding that offering amenity spaces, especially outdoor ones, has increased in importance to tenants post-pandemic.

Tenants may also seek out space where tenant improvement work has already been completed, Carbone said.

“We're seeing a huge push on both the owner and tenant side for things like indoor air quality or spatial utilization, and typically that data is reserved for the actual admins of those spaces or, in some cases, the owner-operator of those spaces,” Join Vice President of Consumer Experience Travis Perkins said. “But the reality is, if you want to attract people back to the office, you have to be transparent. You have to let them know what you're doing.”

San Francisco has seen an uptick of activity, with office tours on the rise, increasing foot traffic in neighborhoods and parking garages near offices filling up. But S.F. is expected to continue to lag behind other major metros in terms of office recovery, according to Moody’s Analytics, which forecasted a rent decline by 15.25% for S.F.’s central business district in 2021.

The question increasingly is not whether people will return to offices but when and how it will take place. An August 2020 outlook survey by KPMG found that 69% of CEOs said they planned to downsize their companies’ physical footprint. However, a subsequent survey this month found that figure had dropped to 17% of CEOs saying they will scale back offices.

While Brookfield Properties Executive Vice President David Sternberg expressed optimism about the future of S.F.’s office market at the webinar, he said he expects that the recovery will be slow and challenging and necessitate a flexible approach.

The need for flexibility resulted in high demand for coworking centers in March, according to IWG Americas Executive Vice President Jim Doorn. Doorn said that there has been a shift in tenant mindset resulting in demand for shorter lease terms and hybrid work models that will diminish the amount of time workers spend in corporate offices.

“At the end of the day, people are going to need office space. We just need to do it differently, and we need to be [focusing on] the needs of the employees because they're going to have more power in a world that has a distributed workforce,” Doorn said.