For the last decade, office real estate strategy has been evolving. Densification, also known as rightsizing, and expansive headquarter campuses in urban locations were signatures of the new office landscape, but open workspaces, hotel-like amenities and smart technology were all part of the trend. Now, the pandemic is catalyzing new changes in the corporate workplace, and already, there are clear trends emerging—creating attractive opportunities for real estate developers and owners.
Fortune 500 Companies Lead the Exit Out of Big Cities
Office relocation has swelled in the last 12 months. In the most headline-grabbing events, major firms have announced plans to move headquarter offices to business-friendly markets with lower corporate and income tax rates, attractive office rents and access to talent. Many of the cities attracting corporate tenants are the same cities experiencing record population growth for the same reason, affordability. On the West Coast, Texas has been the main beneficiary. Oracle and Hewlett Packard Enterprise are moving from Silicon Valley to Austin and Houston, respectively, while Tesla is moving from Los Angeles to Austin. On the East Coast, New York-based companies are sourcing new markets by splitting offices. Condé Nast will divide offices between New York City and New Jersey, while Goldman Sachs is moving its money management division to Florida.
An increase in sublease space is another indication that companies are moving out of top metros. Manhattan and San Francisco have the largest sublease supply in the nation, according to research from Cushman & Wakefield. Manhattan has 19.3 million square feet in sublease space, while San Francisco has 7 million square feet, a staggering 587% year-over-year increase and more than 50% of the overall office vacancy rate.
Companies Adopt a Hybrid Model
Traditionally, many companies are anchored by a headquarter location in an urban core with a spattering of smaller offices across the country. That model is shifting, and in its place a network of regional headquarters, satellite offices, co-working and remote work is taking shape. Microsoft has announced plans to adopt a hybrid work model that will include a combination of office and remote schedules, and Google is testing a similar concept. REI, on the other hand, sold its headquarter office and is testing a hub-and-spoke office model with satellite offices across the country, while Target is reducing its Twin Cities’ headquarter office space by one-third. This will likely mean more office space spread in diverse markets across the country, particularly small metros and suburban markets, as well as more reliance on co-working and flexible office memberships. This allows corporations to expand their prospective employee pool, offer their existing workforce additional flexibility and reduce real estate operations costs.
In CBRE’s 2020 Global Occupier Sentiment Survey, 86% of companies said that flexible office space will play a role in future office strategy, and 30% are already looking at satellite office locations. While many companies are still exploring options, more than 90% of companies surveyed by CBRE are committed to optimizing their office portfolio. While the pandemic has reversed some trends in office strategy, it has accelerated others. Collaborative workspaces, common-area amenities and smart technology are still central to workplace strategy.
Corporate Migration Gives Rise to Real Estate Development Opportunities
Corporate migration out of big cities and a new reliance on regional offices will reallocate demand to new markets. CBRE ranks Phoenix and Raleigh as two of the top office markets in the country for new development, along with more mature markets like San Jose, San Francisco and Boston. Development activity across asset types—residential, office, industrial, retail and hospitality—in 2020 already reveals increased spending in new markets. According to research from Cumming Management Group, Phoenix construction activity increased 15.3% in 2020, and in Raleigh, the pipeline increased by 1.2% last year. Dallas and Miami, two top markets for corporate office relocations from New York and California, also saw a similar increase in development last year. In Dallas, construction activity hit a new record, up 5.3% with a total investment of $35.6 billion. In Miami, new construction increased 7%, and Cummings expects development investment in the city to continue to grow over the next three years. In all of these markets, residential—both single-family and multifamily—construction accounted for nearly half of the total investment volume.
Major markets had the opposite experience. In New York and San Francisco, two of the top markets for corporate exodus, construction activity fell 3.8% and 4%, respectively. However, development in both markets continued to lead the nation both in terms of investment and volume.
Office strategy is still evolving, but one thing is certain, offices are not going extinct. As corporations and real estate developers enter new markets, Northspyre’s intelligence platform can help to keep projects on track—even from a distance, so no owner or developer misses a new opportunity.
Curious to learn how real estate owners and developers are taking advantage of new opportunities and leveraging automation, data analytics and artificial intelligence to achieve easier, more predictable outcomes on their projects? Learn more about Northspyre.