All across our nation, businesses that once functioned from physical offices had to quickly transform their processes to function remotely as the government mandated stay-at-home orders to prevent the spread of the Coronavirus. This proved to be a strenuous and uncomfortable transition for most businesses, regardless of size or structure.
Businesses with just a handful of employees, all the way up to organizations and institutions with thousands, scrambled to piece together the technologies and protocol that would allow them to remain functional, even when separated physically.
The typical boardroom meetings turned into Zoom calls, workshops and training sessions needed to shift to virtual delivery, and much more. As is to be expected, there was a steep learning curve and many technological challenges to overcome.
Now that Pennsylvania is more than a month into its statewide stay-at-home orders, many businesses have found the new normal of working virtually. This is encouraging for those businesses who have managed to survive, and even thrive amidst such volatile times for our economy. However, it presents an uncertainty as to how businesses will choose to resume their traditional work environment, when they have permission to do so.
The national impact on commercial office space
Before COVID-19, around 43% of workers occasionally worked from home [versus 39% in 2012], 62% of workers said they could work remotely, and 80% of workers wanted to work from home at least some of the time.
Working (remotely) through this pandemic will likely increase those percentages, spelling rough waters ahead for office landlords. Now during the stay-at-home and work-from-home orders, employers are seeing how they can operate with some or all their employees working remotely, and do so as, or more, efficiently than from their traditional work environment.
As a result, it’s likely many employers will closely consider how they might leverage the cost-savings associated with reducing or completely eliminating the overhead of physical office space, which will result in increased office space vacancies, shorter leases, reduction of space needs from renewing tenants and less money available for tenant improvements. Vacancies will rise dramatically before they slowly decline. With approximately 8.1 billion square feet of office space nationally, the expected addition of another 335 million square feet through 2024 is very much in doubt.
The local impact
Being the home of Pennsylvania’s capital will provide the Central Pennsylvania region with some shelter, but there is little chance this market does not cool in the very near future. Employment gains have underperformed the national average for the duration of this cycle, and demographic trends are unfavorable. Residents are older, population growth is slow, and the state’s fiscal situation is, quite frankly, a mess.
Harrisburg is an underdeveloped capital compared to Columbus, Albany, and Annapolis; and the cultural epicenter of central Pennsylvania is in Lancaster. Harrisburg is trying to evolve into a knowledge-based economy and has adopted business-friendly incentives that have helped create nearly two dozen tech startups that have generated 1,000 jobs. But the backbone of the economy still lies with Hershey and Rite Aid, which have headquarters in the region.
Fortunately, Central Pa. also has a strong education and medical economy that is reflective of statewide employment. Education and health services jobs, which now track evenly with government jobs in the state’s capital, grew by more than 4% annually.
Expanding employment opportunities have increased demand for office space, and employment in office-using industries is well above prerecession figures; but this remains, and likely will remain, a slow-growth market. Additionally, Pennsylvania as a whole will likely face significant financial problems after the virus subsides.
Vacancies currently sit at close to 6.6%, representing a year-over-year change of 0%, but are almost certain to spike in the very near future. While 12 month absorption figures (9,300 square-feet) can be negative, vacancies remain under control thanks to limited levels of new supply. The limited demand, and high number of small businesses operating here, could hamper the city for years if the quarantine carries on for months, as the federal government is estimating it will.
While the COVID-19 pandemic has left us with more uncertainties than known outcomes, many businesses operating today have also weathered through other tumultuous economic storms including the recession and 9-11. It is without doubt that this particular storm is unique in its ability to impact every industry and every person in one way or another, but there are silver linings to be found.
Stay tuned for Part II in this 2-part series which will cover, “Where do we go from here?”
Mike Kushner is the owner of Omni Realty Group.