Office Space Transformations
Many companies are reevaluating their office space needs, considering the pandemic and the shift towards some form of remote work. As a result, there is a trend of office space transformations, such as flexible workspaces and hybrid models that combine remote work with occasional in-person collaboration. This has led to a reshaping of the office landscape, both in Colorado and nationally.
As commercial brokers in Boulder County, one of the most common questions asked is, “What is the office market like?” The answer for the past few years has been, “Not great.” Across the country, the office market has faced numerous challenges since the pandemic, and Boulder is no exception. Office vacancy in Boulder County has increased considerably from pre-pandemic levels, especially in Downtown Boulder, where issues such as access/cost of parking, operating expenses (including large property tax increases), safety concerns, etc., have been major contributors to the declining market. While we have seen office vacancy increase in Boulder, it is still much lower than in many other areas of the country (a small silver lining). Although many companies are implementing a “return to work” model, this trend continues as the velocity of leases cast before the pandemic is expiring faster than space is being absorbed.
We believe the main cause for the increased vacancy has been the shift towards remote and flexible work environments. While most employers are pushing for a return to the office to improve collaboration and productivity, many have adopted “hybrid” work arrangements that allow their employees to split time between the office and remote locations. Ultimately, this reduces the amount of space they need and how that space is utilized. As more and more employees are advocating for remote work situations, organizations can tap into a larger talent pool, stay competitive in their hiring practices, and retain their current talent.
In addition to the hybrid model, many organizations are rethinking how they can most effectively utilize their space, and (after some hesitation) landlords have followed suit to attract tenants to their buildings. This has created more modern workspaces, including a shift to open and collaborative areas, huddle rooms, building amenities, and a lack of dedicated desk space. Additionally, as office work environments have evolved, so have the technologies required to accommodate the hybrid work model. Companies now incorporate technology-driven solutions into their office spaces, including a reliable and secure network, cloud-based storage, collaboration tools, and video conferencing platforms.
The challenges above in the office market have created opportunities for tenants in Boulder County, which has historically been known as a “landlord-favorable” marketplace. High vacancy rates have created additional competition in the market, forcing landlords to revisit their leasing strategies and get more aggressive/flexible when courting tenants (agreeing to shorter lease terms, offering lower rates and more concessions, including free rent, improvements, and larger tenant improvement allowances).
In addition, there has been an increase in sublease space available as companies have either left the market or reduced their overall footprint to operate their business more efficiently. This sublease space typically comes with below-market rental rates and above-market concessions, as sublessors try to minimize their obligations contained in the original lease.
After three-plus years of case studies, it seems the hybrid model is here to stay in some form or fashion. That said, the hybrid model is only ideal for some businesses. As COVID gets further in the rearview mirror and employers conclude that collaboration and physical presence are necessary, there will be great opportunities to enter a very affordable space. For tenants that can move toward the hybrid model, it represents the best of both worlds: smaller but more efficient spaces that reduce overhead costs while maintaining an in-office presence vital to employee collaboration and productivity. On the other hand, landlords have been forced to rethink their approach to office space by either upgrading their current space to meet the needs of the new, modern tenant or exploring alternative uses for their buildings (i.e., retrofitting current office buildings to mixed-use or residential). While the hybrid model has been a primary contributor to the declining office market, it is a trend we see continuing for the foreseeable future. As such, both landlords and brokers must adapt to the new norm.