Dead Canaries and the current office market

At a recent business lunch, a colleague on the periphery of the real estate industry asked me for my opinion on the current office market. He was baffled that, given our current situation, he kept hearing from brokers saying that the market was “great” and that they had “never been so busy”. We brokers are an optimistic bunch, always believing that the next call might be the one. It takes a little initiative to keep busy, but today much of that activity is spent working with clients as they learn to cope with current realities. Saying the market is great doesn’t necessarily mean it is.

Which brings me back to his question of where I think the market is and what does it have to do with dead birds.

Starting in the early 1900s, coal miners began taking canaries (live ones) into the coal mines with them. We shouldn’t dig too deep into the bodily processes of canaries, but it seems that they take in oxygen both when they inhale and when they exhale. Due to this increased amount of oxygen in their systems, they are much more sensitive to toxic gases and will succumb to them much faster than humans. The coal miners watched the canaries and if they started dropping dead, it was time to get out of the mine. Curiously, this practice continued until 1986, when technology finally took over.

Are there dead canaries lying around the office market? I’ll leave it up to the reader to decide, but here are some observations, from a tenant representation perspective, that perhaps indicate the air isn’t so safe.

Let’s start with the sublet space. It’s been dissected to the point of nausea, but let’s touch on it briefly. There are many. Large spaces, small spaces, short and long terms. My inbox is flooded daily with emails notifying me of new sublet opportunities and reminding me of older ones. There have been many attempts to take sublease space stats and try to minimize them, but stats are easy to manipulate to make a point. Who knows how much space is no longer needed but hasn’t been sublet because the company has chosen to simply end its lease? Is this a fraction or multiple of the listed sublease space? We will know when the leases expire. It seems to me that large corporations that sublease large blocks of space for the remainder of long terms are telling the market that they have no intention of occupying that space. Never.

California wave. Is this happening? Of course, last year I represented a company that was moving here from California. Gave all the usual reasons: taxes, cost of living, politics…etc. But reading all the press on the subject, you’d think it was a tsunami, whereas from the point of view of office use, it might just be a wave. keep on going. Will they save us? Probably not. For example, a recent CoStar article told the story of a tech company in San Francisco, a city hard hit by labor movement from anywhere, that had recently moved and downsized from 81,000 square feet. to 20,000 square feet. The company’s VP of people (gotta love that title) was quoted in the article saying that they were intentionally building “no office” but rather a “specifically designed environment for connecting in person”. I bet their employees can’t wait for next year’s purpose-built environment to connect with the in-person Christmas party. Is it possible that employees, and therefore employers, are starting to think of the “office” in a negative sense? As crazy as it sounds, trends that start in California end up finding their way here too.

Several of the major Northern California-based tech companies recently announced their return-to-work dates, but each is planning some form of remote work for employees. Safe to say, work from anywhere is here to stay in one form or another as businesses decide how to operate post-pandemic. More viable for some businesses than others, but employees have gotten used to it and many don’t want to go back. Recent data puts national office utilization at 38%. Closer to home, DFW is at around 40-45% utilization. Does the remaining 55-60% come back to the office? Some, but certainly not all. How many are coming back remains to be seen, but these companies have continued to operate without requiring everyone to return to the office. If they can reduce overhead and keep employees happy, why wouldn’t they continue in some form?

The trend of mass resignations leading to a shortage of talent will only increase the pressure on companies to allow their employees to work from anywhere. A few years ago, a hip downtown office was almost a necessity to attract and retain talent. Today, that same talent might prefer his home office in Frisco which has a 30-second commute versus an hour commute (each way!). As long as labor shortages continue, the leverage rests with the employee and businesses will need to adapt to deal with it.

The term “flight to quality” gets thrown around a lot these days. Simply put, it’s a business moving into a nicer, newer building from a less nice building. It’s more prevalent in down markets when rates are lower and a tenant can upgrade their space for an amount closer to what they paid in their old building. But the rates are not significantly down; so why would this happen now? The same principle applies if the prices are unchanged but you take up less space. This is great if you are the building the theft is to, not so much for the building the theft originates from, and not for positively impacting the market as a whole.

Finally, a brief story about one of my long-time clients. We’ll call him Doug. Doug has been a successful business owner for a long time and I was fortunate enough to be his broker for almost 20 years. During this time, he consistently occupied approximately 10,000 square feet of office space. Certainly not a market mover, but a nice renewal commission every 5 years. Due to regulations in his industry, Doug had to have all of his employees in a secure office environment. The pandemic arrives and he has to send everyone home. The need for and improvement in technology led to the restrictive regulations governing his business being changed so that his employees could work from home. Doug has used it to expand his business nationwide and business is better than ever. His lease is expiring soon and we are in the market for less than 2,000 square feet. Doug is happy, his people are happy, and I… manage. How many other Dougs are there? We’ll know when the leases start to expire.

I don’t want to pop anyone’s balloon here. There are still plenty of successes in the market and we certainly have it much better than our counterparts on both coasts. Companies will continue to set up there for all the advantages offered by this region. I am only giving a few opinions and observations. Feel free to disagree, but don’t ignore the obvious. Take the daily ride with a grain of salt. We’re in the midst of a paradigm shift in how businesses view office space. All businesses, big and small, are rethinking what they want or need from their office space. Times are changing and to be successful, anyone affiliated with the office market will need to adapt accordingly.

Not a good time to be a canary.

Jose C. Birney