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Analysis Finds That ‘Third Offices’ May Become Part of Sector’s New Landscape

U.S. office tenants, with employees working from home and social distancing, may opt to create suburban “third offices” amid the coronavirus pandemic, according to CoStar's latest analysis.

There have been some predictions that companies could decide to reduce their office space footprints in response to the COVID-19 outbreak after seeing how well workers have adapted to work-from-home mandates. But a much different scenario could come into play, Michael Roessle, CoStar's director of U.S. office analytics, said in a new video. Corporations may instead take steps to decentralize their office operations, spreading them out as an accommodation to health-safety precautions. In some cases, that would mean creating outposts in the suburbs, where workers can avoid the hazards of crowded public transportation or the slow traffic and expensive parking near downtown offices.

“Should physical-distancing protocols remain in place for the foreseeable future, tenants may need to keep their same footprint, even if part of the staff works from home some days,” Roessle said.

“Additionally, there has been greater interest in the ‘third office’ concept. Firms retain the core office in the [central business district], allow flexible work-from-home offices and add a smaller additional suburban office located between employees’ homes and the main office.” So far “there hasn’t been a large spike in sublease space, which would compound any vacancy rate increases,” according to Roessle, indicating office tenants aren't rushing to make any decisions.

The year-over-year increase in sublease space is about 13 million square feet, “not a lot in an 8 billion-square-foot market,” he said.

“Weekly sublease additions remain roughly in line with [where] they have been trending over the last couple of years,” Roessle said. “While these totals are subject to change as this downturn drags on, most firms appear to be in no great hurry to make major real estate decisions right now. This point is underscored by the spread between renewal deals and new deals. If tenants aren’t facing an imminent lease expiration, real estate decisions are on the back burner as it doesn’t appear that firms are anxious to lock up their current space by renewing, even at a potential discount.”

By Linda Moss CoStar News June 4, 2020


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