Odegard sees live/work/play towers in CBDs, "elastic leases" enabling flex offices.
By Jack Rogers | October 18, 2022 | GlobeSt.com
As the CEO of a company that produces one of proptech’s leading data visualization tools—offering advanced predictive analytics—Navigator’s Taylor Odegard has no trouble visualizing the future of offices in central business districts.
From a booth with a commanding position on the CREtech 2022 show floor in NYC last week, Odegard gave us his assessment of the office sector, specifically the fate of office towers populating central business districts in major urban centers.
“From a valuation standpoint, [office buildings] are going to get hit hard,” Odegard told GlobeSt.com. “There’s going to be a very different underwriting process on how they come up with valuations and cap rates for these big buildings.”
“I don’t think we’re facing a catastrophe, I think we’re facing a moment where the commercial real estate industry is fundamentally going to change,” he told us. “It’s going to change the way we operate, the way we lease space and what we build.”
Odegard sees flex offices proliferating. “I think the flex office model will prevail and the hoteling concept will become more and more prevalent, where no one has a standard desk, where people can come in and work on any station,” he said.
Odegard also thinks traditional office leasing scenarios will evolve to match the new reality. “The traditional [model] of a five-year, 10-year or 15-year lease will change fundamentally, with terms where you can retract and grow within the lease—elastic leases,” he told GlobeSt.com.
Odegard sees a permanent paradigm shift in CBD office towers due to the rise of hybrid work, one in which landlords and tenants have diametrically opposite priorities.
“It’s all about work-life balance. We’re never going to see people driving an hour back to the office anymore,” Odegard told GlobeSt.com.
“You’ve got landlords who want tenants in the building paying rent, and then you’ve got the occupiers who know they can have better margins, better EBITDA, with people working at home, with less of an office footprint and less lease overhead on the business,” he said.
By embracing remote work, he said, occupiers can have the same workforce at a reduced total workforce cost—a workforce that’s more productive because it has more productive hours during the day sans the daily commute.
According to Odegard, traditional ground-floor and mezzanine retail tenants in CBD office towers—as well as gyms that leased entire floors—stopped paying their rents during the pandemic across entire portfolios.
“Now we’re seeing the hangover from it—they’re not coming back at all. We’re seeing collections rise like we’ve never seen before,” Odegard told us. “Businesses that have really big footprints—national tenants—may go bankrupt.”
The physical makeup of the traditional large CBD office tower is changing, he said. As office leases expire, more and more tenants are adjusting their office footprints to as little as 20% to 30% of the previous footprint, Odegard said—a process he calls “rightsizing” that he believes is the shape of things to come.
“What we’re going to see here is a lot of tenants not renewing their leases, choosing to downsize, choosing to migrate out of downtown offices,” Odegard told us.
“For the next two years, offices will be a highly depressed asset class,” he said, adding that he doesn’t think the flight-to-quality that is filling up the newest Class A towers will be enough to offset the seismic shift in office demand.
“There are still new office buildings that are empty,” Odegard noted.
What will replace the traditional office tower in CBDs in large urban centers? According to the Navigator CEO, “revolutionary” change is coming.
“Opportunistically, smart landlords are going to think about experiences that might be revolutionary,” Odegard said. “We’ll see the real birth of a live/work/play tower.”
“The future of downtown core buildings will no longer be single use, they’ll be true mixed-use assets able to diversify their tenant base. The tenants will be better able to have a live/work/play experience in a single asset,” he said.