How the Pandemic Has Altered the Future of Physical Space
From offices and residential homes, to retail spaces and fulfillment centers.
Photos by: Riley Snelling©
In the past few years the demand for office space increased, with technology companies holding 22% of that activity. Residential demand continued to boom in cities as more and more people moved to urban areas. Traditional retail brands struggled as digitally native brands expanded their store footprint. And fulfillment centers started popping up all over the country, albeit not quite as fast as they are now.
Since this pandemic has started we’ve seen a massive shift in the demand for physical space. A shift that we originally thought would be temporary, but it’s now clear that many of these changes are here to stay.
As people spend more time at home, office spaces have become less desirable and suburban residential spaces have become more desirable. Employees have realized that daily commuting is unnecessary and employers have realized that productivity doesn’t change. Perhaps it’s even better with technology like video-conferencing. A couple weeks ago, Pinterest paid a $89.5 million termination fee to cancel a 490K sqft office lease in San Francisco. REI also recently announced its decision to sell its corporate campus in Bellevue. It may seem outlandish, but if the future involves more people working-from-home then these moves will result in significant long-term cost savings.
In the residential market, there's a desire for more square footage to accommodate working from home. The demand for suburban housing is increasing while the demand for city apartments is decreasing. It may not be the case everywhere, but it is evident in cities like New York City, San Francisco and Toronto.
I believe these changes and shifts in demand will be long-term. Office spaces won’t completely be eliminated, but commuting is not necessary every day of the week. Additionally, not everyone can afford or even wants a suburban home, so individuals will still seek office space in the downtown core. Therefore, the offices that will exist and even grow in demand will be smaller, flexible co-working spaces with additional locations in suburbs. Despite the struggles co-working companies have experienced during this pandemic, I believe they will be the future of the office space given the flexibility of the lease terms and the variety of locations offered to members.
Retail is more complicated. For years the media has highlighted the retail apocalypse and the inevitable death of malls. In part, I do agree with this sentiment. The department store as we know it will dissipate and the large retail footprint of many brands will diminish. However, once it is safe for us to enjoy in-person activities to the fullest, I have no doubt that shopping in-person will return to some capacity, along with outings to concerts and sporting events. We already saw a preview of this when stores and restaurants initially started to open following the first-wave of the pandemic; national retail sales grew by 18% and 7.5% year-over-year in May and June respectively.
At the same time, retailers have been forced to push traffic online, encouraging shoppers to fill orders through their websites. Brands that had great online experiences (e.g. Dick’s Sporting Goods, Walmart, Target, Lululemon) to begin with or likely even those that started online (e.g. Warby Parker, Everlane, Outdoor Voices), reaped the benefits of increased online traffic. The brands that had to work significantly to improve their online presence and get customers online (e.g. JC Penny, Ross, independent retailers) struggled. And small businesses took this as an opportunity to create an online presence; Shopify’s revenue increased by 97% in Q2. This surge in online sales will force the purpose of the retail store to shift from fulfillment to experience. A shift that many retail brands have already figured out (e.g. Neighborhood Goods, Showfields, Nike, Canada Goose).
In parallel, and probably the most significant demand increase for physical space, is the growth of fulfillment centers. Until Amazon and UPS perfect their drone delivery service at long distances, there will be a lot more localized fulfillment centers popping up around the world. As consumers, we’re expecting to receive packages in shorter and shorter windows of time. This change in consumer behavior and increase in online orders will initiate a massive influx in physical spaces used to fulfill orders, especially for last-mile delivery.
What I love about this shift is that there is a growing movement to utilize all types of real estate for the purpose of fulfillment. Amazon is now in talks with Simon Property Group to take over mall department stores and it just opened up a Whole Foods in Brooklyn purely for the purpose of fulfilling online orders. Walmart has been doing this for years, using its stores for last-mile delivery and recently announced its own Amazon Prime competitor; Walmart +. Its ability to use its physical footprint for fulfillment is a huge advantage. For many years, brands have been restricted from officially changing stores into full-time fulfillment centers due to local land use laws. Any real estate professional can attest to the frustrating and archaic nature of these laws. In today’s economy, where one sector has high demand for real estate, while another is trying to get rid of it, there’s a huge economic advantage in retrofitting for more efficient uses.
Similar to other industries at this time, the commercial real estate industry is suffering. If it's going to survive, it has to be creative. It has to embrace the shifts in demand and dive head first into addressing the new needs for physical space. Landlords will have to be more flexible with their office footprints, likely with more co-working or shorter terms than the traditional 10-15 year lease. Residential complexes will be bigger and on the outskirts of cities with amenities including common areas for working from home. Retail stores will be more specialized and experience-focused. Fulfillment centers will continue to grow and plant roots in all types of real estate. This is the future of physical space. At least until the next world-altering event.
