As companies take varied approaches to in-person and remote work, commercial real estate experts generally agree that office square footage needs will likely shrink with the adoption of more hybrid workspaces.
To address the office real estate shift brought on by the COVID-19 pandemic, Gov. Gretchen Whitmer’s budget proposal released last month includes a one-time, $40 million program to help communities turn vacant offices into new uses through local transition support grants.
The budget proposal recognizes communities’ real estate predicament caused by the pandemic, said John LaMacchia II, director of state and federal affairs for the Michigan Municipal League.
“It’s the recognition of what both the pandemic has had on communities and then what the future impact is going to be on those communities from the standpoint of remote work,” LaMacchia said. “It’s finding ways to help address those issues and stick to that investment mentality and things that matter to our members.”
The Michigan Municipal League supports the proposed program, which would need legislative approval as the budget process plays out before the start of the next fiscal year on Oct. 1.
Eligible local units of government across the state could apply for funding of up to $5 million under the transition support grant program. Municipalities would have to demonstrate the effect that COVID-19 has had on its in-person workforce, such as showing increases in income tax refunds from employment shifting to remote work, declines in commercial property values within the community, an increase in commercial building vacancies, or the departure of employers and their workforces.
The grants could support activities such as rehabilitating vacant buildings, demolishing structures that no longer serve the community, as well as programs to help existing businesses and incubator sites.
Most commercial real estate experts say they are cautiously optimistic that more workers will report to an office this year compared to 2020 and 2021, which could result in employers maintaining their long-term leases. However, most forecasts also predict remote work contributing to increasing office vacancy rates.
Additionally, the declining number of office workers has slowed downtown activity. In Grand Rapids, employee foot traffic downtown is 39-percent lower this year compared to a five-year average of previous years, said Downtown Grand Rapids Inc. President and CEO Tim Kelly. The lack of a lunchtime crowd, in particular, has been challenging for downtown restaurants that depended on the office worker segment pre-pandemic, he added.
“We would welcome any and all tools to move forward,” Kelly said in reference to Whitmer’s budget proposal.
Franklin Partners LLC Principal Don Shoemaker believes communities are yet to see the worst of the office market shift since companies with five- or 10-year leases have not yet made renewal decisions, he said.
“I think there will be way more office space than the world needs because of our ability to have (virtual) meetings,” Shoemaker said. “We don’t feel the impact of the change in the world yet because leases don’t expire all at once. Companies had three or four years left on their lease when COVID-19 hit.”
Jeff Karger, senior vice president of JLL Inc., noted that some employers are still taking the “wait and see” approach for calling employees back to in-person work on a regular basis. Meanwhile, some property owners are considering repurposing their office spaces for new uses, he said.
“Whether they move forward with those plans or not will come down to economics,” Karger said.