The Once and Future Office Market: A Tale of Complexity and Change for Lawyers
By Gary H. London
Many years ago an affluent, very successful client of mine, called me and promptly announced he was talking to me from his home in Aspen. I found it to be a curiosity, particularly because his business interests were primarily in Los Angeles. “How can you be in Aspen?” I asked. His answer involved something about quality of life, including daily skiing or biking, telephonic communication (before the Zoom era) and the occasional plane flight. In short, he could pull off a professional existence that was not tethered to physical location. He was my hero. Today, he is not particularly unusual, as we regularly hear about persons moving to the suburbs, or rural townships, favoring quality of life changes over the rigors and expense of an urban existence. In my case, I am writing this from my Accessory Dwelling Unit, which is city planning language for “home behind my home” which I call my Treehouse. Aptly named because only my best friends are invited to visit, enjoy some wine, and solve the world’s problems. But mostly I work here. I haven’t visited my office or been in an actual room with my colleagues for over six months. I am a meme to them, a Zoom, Skype, or Microsoft Teams visage. Is this a fad or is it permanent? Probably a little of both. But the premise that there is going to be a transformational change in where and how lawyers work is a bit overstated. Consider Apple’s Cupertino Spaceship headquarters. It is no accident that most of the titans of the high technology cluster have built enormous citadels for their work forces, be they Apple, Microsoft, Amazon, or most any of their brethren. Companies like these have all the techie tools, yet they will not abandon their offices. They understand the value of personal contact, collaborative work, casual interface, and all other forms of in-person transactions (company romance?). None will toss their huge investments in office campuses in favor of work-at-home. But there are indications that at least for some of the time, for some of their personnel, that option may be taken.
Reframing Office Needs
It is a certainty that most professional service firms are reframing their office needs, which undoubtedly results in downsizing. This will take its toll on commercial centers be they in our central business districts or in the suburbs. There will be an overall reduction in the use of and demand for office space across most working clusters whose workforce only require a computer and Internet access to be functional for at least part of their workload. We have run the numbers, and this is what they look like across the nation:
In other words, depending on which scenario we apply of persons electing to continue to work from home, ranging from 1 out of 10 to 1 out of 40, the overall reduction in workspace demand could result in an excess of over 400 million square feet across the nation. In California, the reduction could be as much as 100 million square feet and 400,000 workers who become “ex-office.” Here you can see our calculations by metro area:
From Evolution to Revolution
Yet, at some point in the post-Covid world the market will come to its senses and stabilize. The current process is one of re-evaluating office needs, not wholly abandoning. Certainly, the decades-long compression of per person office demand will continue as technology reduces the need for space. We have seen the key metric for office demand — square feet per person — decrease from 250 square feet for much of the last half of the twentieth century to the current calculation of 185 square feet per employee. It may go down further still, and more rapidly. Let me tell you a story. I gave a lunchtime, brown bag speech to the local office of a major law firm some six years ago, where I discussed economic trends, including the downsizing and dispersing office needs. When my speech was over, a senior partner asked me to follow him to his office, where he promptly sat down behind his desk. He pointed to the large law library across the hallway. “See that? That’s our old law library,” he said. No human beings were visible inside. Then he showed me his “personal law library.” He swiveled his chair, turned toward his computer and brought up LexisNexis to access the same information quickly and without leaving his desk. The old-school law firm law library is extinct, and so is the average 2,000 square feet it still occupies in many offices. Notwithstanding the ubiquitous virtual background of a law library behind many lawyers in their Zoom calls over the past year, the law library is no less a relic than the public telephone booths once found in courthouses, airports, and other public places. I consulted with a senior partner at Gensler, perhaps the leading commercial office architecture firm in the U.S. His firm and other architects are busy reimagining the modern office. Terms like “hoteling,” “work bench,” and “flexibility” are being interpreted to define the look of the new office space. So, while the demand for actual square footage will shrink, there will be an accompanying and significant makeover of the new office space, with a prominent role played by modular units and partitions. You can get a hint of their ideas by watching their webinar site. (Active as of June 16, 2021.) It is eye opening. There are competing forces at play here. Even before the pandemic, the long-term movement to more common area working spaces was already giving way to the return of private office space (you know, with a door that you can shut!). Now, it may evolve into something else, perhaps a hybrid of the two.
For the foreseeable future, any growth in office demand is likely to come from the birth of new economic “clusters.” Take my hometown of San Diego, for example. Between 1999 and 2020, the net increase of office space in this 12.5 million square foot central business district office market was just 750,000 square feet. This in a region that added more than 35 million square feet everywhere else for those same 21 years. Yet, somewhere between 3 and 5 million square feet of office space is now currently under construction or planned for the near term. So, what gives? Pundits suggest this market is about to introduce a new business “cluster” into the downtown market in the form of the life science sector, and to a lesser extent, other so-called “high-tech” clusters. This assertion is supported by the recent acquisition of the most ambitious of those projects, the so-called RADD (Research and Development District) with 1 million square feet now under construction (of a projected 2 million square feet) in a campus project on what might be the nicest undeveloped site in urban coastal California. The developer is IQHQ, prominent in the life science market. If they are correct, and the new office space attracts life science companies who have mostly occupied space elsewhere in San Diego County (mainly in the North City submarkets near UCSD), then other projects will benefit. A good example is the current transition of the Horton Plaza site from a shopping center to an 800,000-square-foot commercial office project. That is how most office space markets will grow over the near term. Once the new clusters are seasoned and entrenched, professional services will also be attracted to support their clients, presumably reversing the exodus of prominent law firms from existing office buildings. To explore the point, I recently consulted with a property manager at one of the largest downtown San Diego office buildings, owned by the Irvine Company, the largest owner of commercial office space in San Diego. She reported that actual occupancy of one of her buildings was 19%. In other words, the building was fully leased, yet over 80% of the occupants were working from home. They are not all coming back. Something must give.
A Plug for Murphy Beds
There is another key problem which cannot be ignored to round out our understanding of the sustainability of our office markets, particularly along our urban coast. Shortages in available, appropriate housing, and high costs are a detractor. My firm has conducted many market and feasibility analyses of urban projects. What they have in common are high costs to rent (or to a lesser extent, own), at high densities which are dominated by small units. This doesn’t impact senior partners, but greatly affects the mid-level professional raising families, and certainly the young, entry professional facing high costs for what can only be labeled “transitional” housing, digging deep into their pocketbooks and distancing them from the very elusive goal of home ownership. This housing conundrum happened as the result of environmental regulations, litigation, and public policies which greatly minimize the availability of land for housing. So, consider this: while more people are currently working from home, and many will continue to work from home as part of their regular routine, there are fewer homes from which to work. In 2004, the Padres opened Petco Park, a state-of-the-art baseball park in downtown San Diego. Manager Bruce Bochy lived in Poway, a suburb located 23 miles away. Bochy disliked the long commute from his home to the ballpark, especially when he had to manage a Sunday afternoon game following a game which finished late the night before. Before the ink was dry on the plans for Petco Park, he requested an office with a Murphy bed, so he could go straight to bed in his office late Saturday night and then wake up there early the next morning, skipping the 46-mile round trip in the meantime. And so it came to pass. As new trends in the market for office space continue to emerge in 2021, maybe Bochy’s idea will catch on for lawyers and other professionals. Gary H. London is a real estate advisor whose clients include developers, investors, lenders, asset managers, and owners. He is a partner of London Moeder Advisors, a diversified real estate strategic advisory, development management, investment, capital access, and analysis firm. He also serves as an expert witness in real estate litigation.