By Katie Burke | CoStar News | August 12, 2020 | 8:07 AM
HomeStreet Bank CEO Mark Mason said he knows the Seattle-based company has a lot of space, too much space, in fact. So when the coronavirus pandemic temporarily shut down the country's economy within a two-week span back in March, the community bank began to plot how it could emerge from the crisis with a more efficient footprint.
The company is trying to sublet three of the 12 floors it leases for its downtown headquarters at 601 Union St. and said it could decide to give up even more as the bank weighs a potential relocation. It's one of the first concrete signals of publicly traded companies reimagining their commercial real estate presence in the wake of the pandemic and corresponding economic recession.
Up until now, some companies have bristled at the idea of keeping their employees working remotely on a long-term basis or reducing their offices in top markets that can help them recruit talent. But more executives say they are now closely assessing both the advantages and disadvantages of remote workers. The decisions that result could have repercussions for markets in San Francisco, New York, Seattle and across the United States for years to come.
"We have excess space," Mason told investors on a recent earnings call, adding that the company is evaluating how to change its current footprint. "There's also a question of where we need space. It has been a popular question to me."
Across the United States, publicly traded companies, which have long been the drivers of major commercial real estate transactions, are weighing how much space they have versus how much they actually need. They often sign long-term leases that span years, sometimes decades, and typically transcend any one- or two-year disruptions such as a recession, natural disaster or pandemic. While any new decisions often take years to surface, some large companies are making them now, setting the stage for an office market different from the one that kicked off the beginning of 2020.
Financial institutions such as HomeStreet as well as advertising giants, education platforms, e-commerce retailers and medical providers are all rethinking how and where they should make changes to their commercial real estate presence. The diversity shows it isn't just large tech companies, such as search-engine giant Google or transportation app Uber, that are dictating the market's direction.
"There will be a good amount of companies that will decide they need less office space," said CoStar's director of market analytics Ryan Patap in Los Angeles. "Some will work with a mix of remote and office work, but flexibility is something that's going to be part of the decision making for many of them."
Over the past six months, demand for office space in the United States hit the lowest level since 2011, and the economy shed roughly 4 million office-using jobs, according to CoStar data. Businesses forced to shut down their offices have kept a majority of their employees at home, and even for those that have reopened, social-distancing guidelines and issues such as how to navigate elevator banks in multi-tenant buildings have made it difficult to operate at normal capacity.
While many in the country's workforce remain at home for now, companies that are plotting their return to the office are realizing that employees don't need quite as much space as they may have originally thought.
"Our initial reaction was because of the social distancing, we're going to need more space, right, because you're going to need six feet apart and so on," said Michael Roth, chairman and chief executive of Interpublic Group of Companies, in a call with analysts. "In fact, it's the exact opposite."
Even so, other companies are still trying to determine the net effect of the need for additional space for social distancing and what the long-term effects will be for workers at home. Surveys have shown that a significant portion of workers would like to have both office and work-at-home components to their jobs, and some companies have mentioned having hub offices in areas that don't require workers to make long commutes on public transportation.
Despite the increasing uncertainty, Patap and most company executives can agree on one thing: The workplace as many know it may not return entirely as it was, but it won't be disappearing.
"Any way you slice it, office is going to be around," the CoStar analyst said. "Even if you cut 15 to 20% of demand, and that's totally conceivable if downsizing across the board happens, that will be huge in terms of vacancy rates and asset values, but the pandemic isn't scaring everyone away."
From a New York City-based advertising giant to an online university operator, here's how five publicly traded companies are mapping out their future real estate plans:
HomeStreet Bank
Sector: Financial
Headquarters: Leases 177,215 square feet at 601 Union Street in Seattle
HomeStreet is hunting down one or more sublessees for three floors of its 12-floor lease, and the company has reached a fork in the road in terms of whether it will retain its current space commitment or shed some of its office area.
"If we end up more permanently having some of our employees work from home, obviously, that decreases space needs," Mason said. "If we move to, in some functions, more of a hoteling concept with partial time at home, obviously that would as well. On the other hand, the pandemic has increased spacing requirements. So what's the net of that? I don't know."
The company has banking locations up and down the West Coast as well as a multi-level headquarters lease in a downtown Seattle tower.
Mason said the firm is looking at local issues, such as a proposed tax on high-income workers, a reduction in police spending and increasing political unrest, in debating whether it wants to remain in Seattle.
"There's a lot of real estate challenges today," Mason said. "It's a very challenging environment that we don't really know what the long-term repercussions will be."
Interpublic Group of Companies
Sector: Advertising
Headquarters: Leases 300,940 square feet at 909 Third Ave. in New York City
Interpublic Group of Companies, the advertising giant, cut back its office space as companies across the country scrambled to shore up their financial reserves through layoffs, furloughs, temporary pay cuts or a variety of other measures.
The company told investors on its recent earnings call that it has permanently vacated 500,000 square feet of the 11 million square feet it currently occupies around the world, a figure that could increase if it decides it needs less space.
"The way we're going to do business in the future is going to be materially different, and we're taking advantage of this right now," CEO Michael Roth told investors on the company's second-quarter earnings call. "We're learning from our people; we're learning who has to be in the office; we're learning what people can do things from home. The footprint of the agency business is going to change, period."
Throughout the second quarter, the company made substantial cuts to its real estate and personal expenses in order to permanently lower its operating costs, much of which was prompted by changes triggered by the pandemic.
The CEO said that, at first, the company thought it would need more space because of social-distancing requirements. However, with its decision to allow more employees to work from home, the opposite has proven to be true.
Along with adopting a work-from home and hybrid office-home set up for employees, the company is laying the groundwork for when and how it returns to the office.
"There is no question that the use of the office will change in the future, and we're taking advantage of it," said Roth, who added that mass transportation is currently the biggest hurdle the company faces in getting employees back to the office. "When we talk about positioning IPG for 2021, we're anticipating a change in the footprint of our organization significantly."
Strategic Education Inc.
Sector: Education
Headquarters: Leases 56,191 square feet at 2303 Dulles Station Blvd. in Herndon, Virginia
Strategic Education said it has permanently transitioned its Strayer University and Capella University platforms to fully online models and is debating whether its educational program needs physical space at all.
The for-profit university company's real estate footprint was already relatively compact thanks to its predominantly online education business. But since the pandemic forced all of its campuses across the United States to temporarily close, the company has not provided its educational services in physical space.
With rising unemployment and a hesitancy among students to enroll in a traditional university program, business for Strategic's online program has leaped in recent months.
On its latest earnings call, the company told investors it would maintain some of its physical locations for academic support, faculty coordination, international student classes and brand building, but it is now able to significantly reduce costs by shrinking those existing campus footprints.
According to CoStar data, the company leases more than 85,500 square feet of space across multiple locations in the United States.
CEO Karl McDonnell said on the call that prior to the pandemic, only about 5% of its educational services were taught in physical spaces, a figure that has since dropped to zero since the pandemic's outbreak earlier this year.
"It just makes sense to move where students' preferences have already been going over the last several years, which is fully online," McDonnell said.
Magellan Health Inc.
Sector: Health care
Headquarters: Leases 9,497 square feet at 4800 N. Scottsdale in Scottsdale, Arizona
Magellan Health said it is planning to make remote work the predominant setup and plans to spend a total of approximately $15 million to sever its lease agreements throughout the remainder of the year.
Even before the pandemic forced many U.S. office workers to do their jobs at home, Scottsdale, Arizona-based Magellan Health had about half of its employees working on a remote basis.
Now, the long-term shift has made it possible for Magellan to reevaluate how much space it will need for the future, and the company told investors on its second quarter earnings call that it is planning to permanently transition more employees to a work-from-home or flexible workplace option, meaning it will terminate some of its leases across the country.
"We intend to take additional real estate actions throughout the remainder of the year," said CEO Kenneth Fasola. The company reported spending about $8.3 million in lease abandonment charges last quarter. The company is planing to spend a total of approximately $15 million to sever its lease agreements throughout the remainder of the year.
The company did not respond to CoStar News' request for comment to detail where those offices are located, and where further reductions would likely be made.
Stitch Fix
Sector: Retail
Headquarters: Leases 95,208 square feet at One Montgomery Street in downtown San Francisco
While Stitch Fix doesn't have the expansive brick-and-mortar footprint most retailers have, the San Francisco-based digital styling service's home in the most expensive office market in the country has prompted its shift to lower-cost markets.
After laying off about 1,500 of its San Francisco-based stylists in June, a near 20% cut to its entire workforce, the company is rolling out plans to rehire the positions in less expensive cities such as Austin and Dallas, Texas; Pittsburgh, Pennsylvania; Cleveland, Ohio; and Minneapolis, Minnesota. It expects to hire about 2,000 people through 2021.
Stitch Fix CEO Katrina Lake told investors on the company's recent earnings call that the decision to move stylists to cheaper markets was a critical cost-saving measure in order to meet goals it has since revised because of the economic fallout of the coronavirus.
"We want to continue to invest in our stylists,” she said. "The reality was as we look at kind of our aggressive goals, we’ve made a decision that was a hard one, the one that we needed to make."
