COVID-19 has been painful to the Milwaukee-area office market, but because the physical office offers so many benefits to companies, market demand isn’t going away long term.
That was the shared opinion of a panel of office market experts who discussed the market’s struggles and future outlook during BizTimes Milwaukee’s annual Commercial Real Estate & Development Conference, held virtually on Nov. 19. Click here to watch on demand.
The local office market effectively came to a standstill during the first 60 days that the coronavirus spread nationwide earlier this year, said Lyle Landowski, managing director and partner of Colliers International | Wisconsin.
The pandemic became real for Wisconsinites in March, when the state and local governments began mandating shutdowns of certain business activities. Office market demand still has not normalized in the months following, Landowski said.
“The short version is, it’s kind of painful,” Landowski said. “The pullback in demand has been significant and real in the short term. … I’d say we’ve slowly been gaining momentum since; there’s been some activity. I’d say activity has been far greater in the suburbs than it has been downtown, but we’re starting to see activity downtown again as well.”
Overall, demand is down about 50% compared to normal, with the downtown demand decline being even worse than that, he said.
“There’s very clear short-term winners and losers throughout this pandemic,” said John Coury, founder of Detroit-based Crestlight Capital and part of the ownership group of the Schlitz Park office complex in Milwaukee. “We’re still learning a lot on a daily basis, but I think what we’re seeing throughout the market is core central business districts with 30-story towers are seeing a different type of demand than your mid-rise or single-story product, either on the outer fringes of the urban core or the suburbs.”
Even so, there are no signs that the demand for office space will go away long term, he said.
“The office is going to change and new trends will come out of this like any recession, but it’s impossible to train new employees, create culture and maintain culture when everyone is on an island in their own house,” Coury said.
He used the example of Yahoo, which at one time shed itself of any office and had all employees work from home. Coury said the company changed its mind after only a year or so because employees missed the collaborative work environment an office provided.
Heather Turner Loth, project development practice leader and workplace strategy leader with Milwaukee-based Eppstein Uhen Architects, was in agreement.
“You can’t necessarily sell a culture fully through the virtual environment,” she said, noting that studies show “chance interactions” around the office generate ideas and build trust among colleagues.
“Once that trust is free flowing, innovation can spike,” Turner Loth said. “Office is not dead. I am fully bullish that it is going to come back.”
It certainly isn’t an ideal time to open a new downtown office building, but Milwaukee has seen two of them open this year: the BMO Tower at 790 N. Water St. and the Huron Building at 511 N. Broadway.
Milwaukee-based developer J. Jeffers & Co. opened the 11-story, 287,000-square-foot Huron Building in early October. Law firm Husch Blackwell moved its Milwaukee office into the building’s top three floors.
“COVID-19 was definitely not in our financial projections in late 2018, early 2019 when we closed on the financing,” said Josh Jeffers, president and chief executive officer of J. Jeffers & Co.
One thing helping out the Huron Building is that it’s already about 50% leased. It has Husch Blackwell as an anchor tenant, and Tupelo Honey restaurant as a ground-floor retail tenant. The restaurant has not yet opened. Jeffers said the project has so far been able to cover its debt service and operating expenses, giving his firm some breathing room to wait out the pandemic.
But it has been hard finding more tenants willing to execute a deal during the pandemic-fueled period of uncertainty, Jeffers said. The larger users seeking a full floor, with whom he had been talking before the pandemic, have all opted for short-term lease renewals, he said.
“I think some of the larger office users are reticent to make major leasing decisions right now, at least until there’s a little more clarity surrounding what’s happening with COVID and the whole work-from-home dynamic,” Jeffers said.
Of course, the office environment won’t be the same as it was pre-pandemic.
Some office users are already making immediate changes, such as implementing touchless technologies, upgrading HVAC systems and installing barriers between workstations, Turner Loth said.
Meanwhile, they are figuring out what their needs are long term, she said. Considerations include whether to have separate visitor and employee lobbies.
Another long-term change that panelists predicted is greater flexibility to work from home.
But even at a time when public health officials stress physical distancing, the social nature of humans cannot be eliminated permanently, Landowski said.
“Our level of happiness and productivity, all of those things, even if you take them away in the short term, we’re going to want them back,” he said. “I just don’t think you can bet against that in the long term.”