Reimagining the Role of the Modern Office

Brad Thomas

467 postsAugust 11, 2021

As the workforce slowly returns to the office, it has become clear that the role of the traditional office environment is evolving. Many employees have experienced an improved work/life balance and greater productivity while working from home and avoiding a long commute to the office.

Others, however, have indicated a loss of community and collaboration due to the absence of a coworking environment. New employees in particular may suffer from a lack of mentorship in a virtual office environment, while established employees may prefer to work from home in order to balance childcare with work responsibilities.

While the “pros and cons” list seems to be nearly balanced in regards to returning to the office, many businesses have decided to take a step away from traditional office space following the pandemic.

There are certainly benefits for businesses who have decided to adopt a virtual work environment. Greater pools of new talent can be accessed without the restriction of a physical work environment. Money saved on an expensive lease can be used to improve technology, making a virtual office community even more productive. The physical office is far from obsolete, however. In these changing times, property owners of office space must adapt to ensure that tenants choose to lease their space.

The modern office must offer services beyond the standard cubicle to compete with the home office. The purpose of the office must be reimagined. Rather than a space to sit at a desk and send emails, the office must be a destination for meeting coworkers face-to-face, getting inspiration, and exchanging ideas.

The modern office can easily provide employees with more resources than a home office. Not everyone can work from home in privacy, with no interruptions. Few have the resources to enjoy enterprise-grade equipment and technology. The most important draw of the modern office is the opportunity to interact with coworkers. Building owners can facilitate collaboration in their office spaces by planning more multifunctional common spaces.

As Fitch Ratings reports in an article entitled “Return-to-Office Delays Are Not an Eminent Risk to US Office REITs,”

“Some landlords and tenants are retrofitting spaces to improve safety and enhance the employee experience with de-densified workstations, more breakout rooms for privacy and collaboration, and added amenities.”
Fitch Ratings states in the same article that although demand for office space remains uncertain in the aftermath of the pandemic, new supply “is in line with long-term growth levels in most markets.”

With this said, the evolving workforce will continue to demand more flexible work arrangements. This requires the modern office space to adapt, offering resources and coworking opportunities that cannot be found in the home office.

In addition to the layout, an office’s square footage will also play a role in the salability of the space. Ironically, the immediate effect of returning to the office after the pandemic will be a demand for more office space per person, to facilitate safe distancing protocols. In the long-term, however, a combination of in-office and remote work, with less than one desk per employee, is likely to be the standard. Instead of high-density, large office space that is meant to accommodate all employees under one roof, corporations may adopt a more “pandemic resistant” model, leasing several small offices in multiple locations. In areas where there is already a deficit of small, modernized office space, COVID-19 may amplify the marketability of such spaces, even if the overall demand for office space remains unchanged.

On the other hand, outdated, large office spaces are likely to suffer. This type of space is quickly becoming a product that no one wants anymore. With a bit of inventive adaptation, however, large office spaces can attract profitable tenants. While the standard response to obsolete commercial property is to simply tear down the old structure and build something else, there is a new market emerging that can provide an alternative use for once-prime large office space. While it may seem counterintuitive that an increase in virtual office space may result in a need for physical space, the data centers that power our Zoom meetings have a large real estate footprint.

In the IDC white paper, Data Age 2025, Seagate predicts that the global datasphere will grow from 45 zettabytes in 2019 to 175 zettabytes by 2025. This estimate is conservative, especially considering the massive impact that COVID-19 has had on internet traffic. Zoom conferences, increased online shopping, and even home schooling have escalated the world’s internet traffic during the pandemic, and this is reflected in data usage. An increased demand for data usage results in an increased demand for data centers.

Of course, there are challenges to overcome when leasing former office space to technology companies. Data centers are essentially large warehouses that contain racks of processors, and they require huge amounts of power. Because data centers must have an uninterrupted power supply, they must also store large batteries to activate generators in the event of a power outage. The generators themselves are massive. This heavy equipment may require industrial-strength load bearing floors. Ceiling height is often required to be 14 feet, as well, to accommodate the cooling systems necessary for data centers to operate.

Despite these challenges, there have already been a number of successful conversions. For example, the former Sun Times printing plant in Chicago was renovated by QTS Realty Trust (QTS) into a large data center. Small, local data centers are also growing in popularity as opposed to their large, industrial counterparts.

Building small, local data centers in city centers, where large office space is often located, has several unique advantages. Speed is of primary importance to many data users, and close physical proximity is necessary for very low latency. Driverless cars and cloud services, for example, would have a speed advantage if utilizing a local data center rather than a large an out-of-town facility.

Locating data centers in town may also create opportunities to recycle the large amounts of waste heat that these facilities produce. In downtown Seattle, for example, Amazon’s (AMZN) headquarters have been piping waste heat from their data center into a district heating plant since 2018. Waste heat could be used to heat an office above a ground-floor data center, or even may heat nearby residences.

In summary, although the future of office space is changing, office space is far from obsolete. The modern office is evolving to better accommodate a technologically advanced workforce, and the pandemic has accelerated the reimagining of the modern office.

Whether property owners decide to focus on providing in-demand, “smart” office space, or reconstruct outdated office space as data centers to provide for virtual office environments, office space will continue to play an important role in the commercial real estate sector.

I own shares in these office REITs: City Office (CIO), SL Green (SLG), and Boston Properties (BXP), I also own shares in these Data Center REITs: Digital Realty (DLR), CyrusOne (CONE), and Iron Mountain (IRM).

Happy Investing

Brad Thomas

467 posts

View all my Posts

Brad Thomas is Senior Research Analyst at iREIT and CEO of Wide Moat Research LLC. With over 30 years of real estate experience, he is also long-time Editor of Forbes Real Estate Investor, a monthly subscription-based newsletter that dives deep into the vast world of profitable properties, and since 2021, he has served as an adjunct professor at New York University.

Thomas has also been featured on or in Forbes magazine, Kiplinger's, U.S. News and World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. And he was the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021 based on both page views and number of followers.

Thomas is the recently-published author of The Intelligent REIT Investor Guide (2021), co-author of The Intelligent REIT Investor (2016), and he wrote The Trump Factor: Unlocking The Secrets Behind The Trump Empire (2016) - all available on Amazon.

Thomas received a bachelor of science in business/economics from Presbyterian College and is married with five wonderful kids.

“We Take Inflation Incredibly Seriously” (Except When “We” Don’t)

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Reimagining the Role of the Modern Office

Brad Thomas

467 postsAugust 11, 2021

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Reimagining the Role of the Modern Office

467 postsAugust 11, 2021

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