Implications of Managing a Returning or Hybrid Workforce
As employees gradually return to their office space — whether partially or via some hybrid model — with COVID-19 restrictions lessening and vaccine distributions increasing, many challenges remain for CFOs, controllers and other accounting professionals as well as their clients. An NJCPA Business & Industry Professionals Interest Group panel discussion in March looked at the hard questions for getting back to work in an office: Will employees demand different workstations? Will employers have to oblige? If so, at what cost? What are the most practical approaches to take regarding office space in a post-COVID environment?
Reconfiguring Office Space
Commercial real estate was dramatically impacted by the pandemic, but it had started slowing even before that. According to Frank Giantomasi, Esq., a member of the real estate, development and land use group of Chiesa Shahinian & Giantomasi (CSG) PC in West Orange, and a panelist on the webinar, “The demand for office space in New Jersey was really not a hotbed of activity. Nobody was building office space on spec before COVID.”
During COVID, however, some regional New Jersey office space was in demand but not in the traditional way. “What we’ve seen is some of the larger commercial entities, such as banks and financial institutions, realize when COVID hit, that they were going to have to do something to get ‘offices out’ to where their employees lived,” said Giantomasi. “People weren’t going on mass transportation; they weren’t going on New Jersey Transit. They were not going in vans. What we have seen and continue to see is big, mega occupiers or alcoves in Morris and Bergen County of around 30,000 to 50,000 square feet, where a hub of offices was created.” He does not expect companies to relocate their corporate headquarters out of New York, though sizable outposts have started to develop elsewhere.
“Hybrid is probably going to be the number-one way to occupy and do business, but we have seen occupancy has increased since March of 2020 and it’s expected to increase,” said Giantomasi. Since the beginning of the pandemic in March 2020 when no one was in the buildings, he now sees an increase of about 11 percent. Vaccines have not fully kicked into gear yet, he adds, which creates challenges for apprenticeship-like professions, such as accounting and law firms.
Some companies, however, are finding other uses for unused office space. “Office buildings are going to become more creative in the way they attract tenants,” said Eric Ladden, a principal in the Cornerstone Real Estate Group of Morristown and a panelist on the webinar. Former office space in Roseland, for example, is being converted into age-restricted residential and hotel spaces.
Added Giantomasi, “We are seeing a lot of charter schools, particularly in Newark, leasing floors in office buildings. They are creating separate entrances and taking two, three or four stories to have a charter school occupy a commercial office building.” Growth in industries, such as life sciences, will further fill in any empty office spaces that exist, he added.
Before workers fully return to their offices, tenants are demanding that a building’s HVAC air filter system be upgraded, reminded Ladden. As he explained, a Minimum Efficiency Reporting Value (MERV) rating on buildings’ HVAC systems in New Jersey is usually 8, 9, 10 or 11. “The recommended value is for 13 or 14 to protect from COVID. The issue is that a lot of buildings in New Jersey don’t have the horsepower effectively in their HVAC system to blow the air strongly enough to get through.” This will be a big topic of discussion, he said, when tenants are renegotiating leases or new tenants are moving in. “HVAC systems are going to be major cost drivers.”
Though vaccine distributions are determining, for the most part, when workers feel comfortable to return to an office setting, enhancing office amenities are on the rise. According to webinar panelist Marlyn Zucosky, associate AIA and director of interior architecture and design at Ware Malcomb in Princeton and Newark, the “hub and club” model is popular. With so many employees working from home, when they finally head back to the office in some format, club-like amenities are going to be popular, she explained. “What we are seeing is a hybrid work model, where they can work from home, and when they need to go into the office, they use all of the club-like amenities,” she said, noting golf simulators and putting areas are being installed.
Ladden also saw interest increasing for gyms and other amenity packages. “New York City was on the cutting edge of this over the last decade in the tech revolution where, in order to attract young people to work for them, companies were taking extra space in their offices for ping pong tables or pool tables, etc.” Commercial owners are trying to reimagine the office space of the future, he said.
Though the open-office concept is not dead, Zucosky noted that office configurations that provide more worker protection and flexibility are common right now. “Simply by rotating the way people face is going to provide a little bit more protection. Typically, we have built-in workstations. Now, what we are suggesting is free-standing desks. You rotate them so people can face different directions.”
Workers’ mental health is also playing a role in office designs. “HR is now at the table since there have been a lot of mental health issues as a result of the pandemic. Wellness is going to play a big role moving forward,” said Zucosky.
For those accounting professionals who have retail clients, Ladden acknowledged that some brick-and-mortar stores will always be in demand, though shopping in this manner has been drastically reduced because of the pandemic. “Retail and office space are going to benefit from the fact that the characteristic of humanity is that we are social creatures,” he said. Similarly, it’s a social experience to go to the mall, he said. “At some point people will say, let’s get together and go somewhere, and in New Jersey, that means the mall. People want to have that experience when they are out.”
As retailers grapple with rents amid COVID-induced revenue downturns, the panelists expect the most litigious real estate issue over the next couple of years will be about rental payments during the pandemic and what constitutes a force majeure clause (disruption of an obligation). “It’s absolutely one of the most contentious clauses in lease negotiations,” said Ladden. However, “Everything is negotiable,” he added.
Not every real estate sector has taken a negative turn due to the pandemic; a big contributor to the surge in the cost of industrial space is the tremendous demand for warehousing. With ports jammed on the West Coast due to a boom in online purchases, ships are having difficulty offloading and getting berth space, forcing companies on both sides of the United States to take commercial space and build warehousing, added Giantomasi. “If you have clients who have industrial land, tell them to hold it. This is a disappearing asset,” he said, noting that clients in Newark are building warehousing to meet such demand.
“The industrial market has just gone parabolical,” added Ladden, who is seeing industrial land being built completely on speculation. “The ‘Amazon effect’ is real. COVID has made it that much more intense on every aspect of things,” he said.
And for an interior architect like Zucosky, that means a lot of business. “We can’t design industrial buildings fast enough,” she said, noting a new industrial property in Brooklyn is fully leased.
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