A Year of Discovery and Adjustment

This article is featured in the March issue of Seattle Business magazine. Subscribe here to access the print edition.

When you walk through downtown Seattle, you can see how Covid and the subsequent recession have severely impacted commercial real estate. Few pedestrians, boarded-up storefronts, retail and restaurant closures, and empty offices and hotels are a stark contrast to where we were in early 2020.

To illustrate, it was recently reported that more than 155 businesses have permanently closed throughout the central core of the city, including major retailers such as GAP, Columbia Sportswear, Brooks Brothers and T.J. Maxx. The pandemic has caused a trickle-down effect on construction as well. What we see in Seattle is also occurring in markets across the country.

Urban cores continue to struggle with recent trends showing that both people and businesses are moving to the suburbs, especially in cities that rely heavily on public transportation.

In Seattle, the pandemic has accelerated an already growing migration trend away from downtown to the Eastside. This shift can be partially attributed to newly implemented business taxes in the city of Seattle, coupled with the positive business environment in many suburban markets. And although the retail and hospitality industries have been hit hardest, Seattles office sector also experienced unprecedented challenges in 2020.

On the surface, the market-wide office vacancy rate in Seattle appears to be relatively healthy, ending the year at 7.7%. While this figure does include a significant increase in sublease space (accounting for 28% of the total), it does not include the bevy of office spaces where leases are in place.

Still, the space is sitting unoccupied with employees working from home. Significant new leasing and investment deals are still being done, but the volumes are well below prepandemic levels. Because of the uncertainty, tenants are executing shorter-term leases that allow them to see what recovery looks like before committing to a long-term business model.

This could have a massive impact moving forward and could take a decade for people to return to work at prepandemic levels, causing a much longer lag in the recovery than initially expected. Although Seattles office sector experienced many challenges this past year, the negative impacts have been lessened in part by strong activity from the technology sector.

Amazon has committed to more than 3 million square feet of new office projects in Bellevue, while Microsoft, Google, Facebook and Apple have also shown various activity levels in 2020. Even though many tech companies are planning a slower return to the office than more traditional industries, the tech sector has shown little signs of slowing down in the near term.

While some businesses have reopened at a limited capacity, commercial real estate will continue to be unpredictable across all sectors until immunization has reached critical mass. The vaccine will not only provide obvious health benefits, but it will also deliver a much-needed boost to employee morale and mental well-being, allowing people to feel more comfortable returning to work. But it will take time.

As a result, 2021 will be a year of discovery and adjustment. The pandemic has fueled the need for office space to better support social distancing, provide cleaner and more efficient work environments, and offer remote work opportunities. Approximately 60% of employees expect to have a balanced work environment and greater work flexibility, both in how and where they work. This balance is essential for market recovery, employee retention and talent recruitment.

Companies must also embrace remote work strategies and reimagine the physical office space to accommodate todays workplace environment. As employees return to work, changes may include staggered shifts, limited hours in the office and preplanned collaboration times. Fundamentally, people want and need socialization. Studies have shown that employees have a strong desire for face-to-face interaction and in-person collaboration.

While positive trends are already emerging, and Seattle appears to be recovering faster than other parts of the country, there will be high levels of uncertainty and challenges in 2021. The economic environment and real estate sectors will continue to be volatile until the Covid-19 crisis is resolved and the new normal becomes a little clearer.

Jeff Lyon is chairman and of Seattle-based commercial real estate firm Kidder Mathews.