John Finegan / April 1, 2021
Originally featured in our 2021 Greater Portland Market Outlook.
COVID-19 has had an enormous impact on the way each of us work and live and an attendant effect on the office market. Landlords and tenants have been forced to navigate these uncertainties as best they can. In this article, we note some of the best practices for officing during the pandemic, review the market situation, and look at emerging trends that may guide the year ahead.
CDC guidelines for safely welcoming employees back to the office include social distancing, which is best achieved when employees have their own office and can shut the door. Over the past decade, the trend has been away from private offices, and many companies have made them obsolete. The furniture industry has quickly jumped on the opportunity to sell new products like demountable walls, privacy partitions, and anti-microbial surfaces. Phasing employees in on specific days is a tactic being used by many companies—as well as schools—where social distancing cannot be otherwise achieved. HVAC systems are an important consideration for tenants and landlords. Forced-air HVAC systems that are designed to treat a single tenant’s space have proven far more effective at reducing the spread of COVID-19 and other pathogens than systems that share the air through multiple offices. It is also important that these systems include above-standard air filtration (MERV-12 filters or higher, as long as airflow is not impeded), bring in enough outside air to meet ASHRAE standards and local codes, have good air distribution within each room, and use bipolar ionization. HVAC systems that use bipolar ionization are becoming the gold standard since the FDC confirmed that these solutions kill COVID-19 in the air and can be installed for roughly $1,000 for a 2,000± SF space. This is something new that landlords may be asked to fund for tenants, and may be key to attracting tenants in the future.
As Nate Stevens mentioned in his overview, the amount of vacant office space increased from 811,392± SF to 1,068,506± SF in the past year. It will continue to increase as leases expire and office tenants opt to reduce their footprint rather than continue paying rent for space that they don’t use. The decrease in demand and increase in supply has shifted the negotiating leverage in favor of tenants, and landlords are becoming amicable to concession packages. While larger tenants still have limited options, many smaller tenants are seeking short-term renewals in an effort to “ride out the storm” and make a long-term decision once the future is clearer. Landlords are inclined to accommodate these short-term extension requests because their alternatives are unclear as well.
Some office tenants with term left on their lease are offering a portion of their space for sublease, so as to mitigate costs while some, or all, of their workforce is working from home. As Nate mentioned, in 2019, the amount of sublease space available in Greater Portland was 39,489± SF. That number has climbed to 212,276± SF, a 535% increase in the last 12 months. This increase includes 38,367± SF at 100 Middle Street offered by accounting firm BerryDunn, who is relocating to the suburbs. It also includes 104,752± SF at 2 Gannett Drive in South Portland that is being offered by Anthem, along with several smaller sublease opportunities ranging from 2,000± SF to 13,000± SF.
In addition, many tenants have notified their landlords that if a tenant came along and wanted to lease their space, they would happily do it, although their spaces are not formally listed for sublease. This “gray space” is expected to become a significant factor for transactions in 2021. The 212,276± SF of space currently listed for sublease is only the amount being advertised. We believe the actual amount of gray space to be much higher.
So far, the Greater Portland office market has seen little decrease in rental price as a result of the pandemic. However, transactions are down and landlords are deciding whether it is worth marketing space at a discount—devaluing their asset for several years in order to avoid what might be a relatively short period of vacancy. Some may let their space sit vacant and absorb short-term costs of vacancy and/or provide elevated concession packages, such as free rent to secure tenants, rather than repeat the rent cuts we saw in 2008 and 2009, partially because they view this as a short-term blip and not a shift in economic fundamentals.
Our recent COVID Office Impact Survey found that 71% of participants were working from home either full- or part-time, but only 49% felt it was an effective solution. Employees are getting “Zoom fatigue,” having ergonomic issues, communication problems, and technology issues. While working in pajamas may have seemed ideal at first, the lack of social interaction and easy collaboration is becoming more problematic as the months go on, reinforcing the need and desire for physical office space. Companies are motivated to bring employees back for a number of reasons—productivity, culture, collaboration, and mentorship—and I believe that we will likely see a return to the pre-pandemic usage of office space when it is safe to do so.
In a separate COVID-driven trend, Maine has seen a massive boom in the housing market, as people from major metropolitan areas flocked here to work remotely and take advantage of the relatively-low incidence of infection in the state. Post-pandemic, will some of these newcomers turn into new office tenants? Will they bring new jobs with them? Co-working spaces could see an uptick in demand if companies headquartered in other states provide a budget to help satellite employees.
2021 will be a year of continued change in the office sector. Where there is change, there is opportunity. We predict that landlords who can adapt and respond to the changing needs of tenants will be successful. In addition, the potential for significant amounts of space coming available could offer the type of opportunity that encourages new and growing businesses to add staff and ramp up to the next level. Exciting times—stay tuned.