Long-Term Office Leases Are Losing Steam; Darwin Would Be Proud

Amol Sarva is CEO and Co-Founder of Knotel, the world’s largest flexible workspace provider. 

For a second, I thought I misread the headline. “Pinterest pays $89.5 million to terminate San Francisco office lease.” Could that be right? A company paying $90 million not for a new, state-of-the-art, futuristic HQ, but rather just to get out of a lease. What an eye-popping price tag (read: penalty) for a company to have to pay to extricate itself from a long-term lease. In its announcement, the company cited a shift toward distributed work, due in part to the coronavirus pandemic, in its decision.

Pinterest is certainly not alone. For many in commercial real estate circles, it’s been a tough year, to say the least. But while the pandemic has undoubtedly disrupted large swaths of the global economy, it’s also accelerated the future. While JLL data indicates a sharp drop in office leases in the U.S., other reports show that flexibility is on the rise. Though our market comprised just a sliver of the broader commercial real estate market in 2019 (approximately 1.8%, according to CBRE), it has been growing at an annual clip of around 34%.  

To paraphrase Darwin, it’s not the strongest companies that survive, nor the most intelligent, but rather the most responsive to change. So, can we take that to mean that flexibility is a competitive advantage for companies, just like intellectual property or highly skilled labor?  

To answer that, it’s worth looking back at the origins of flexibility in the context of modern organizational design. The Flexible-Firm Model, pioneered by John Atkinson in 1986, suggested that organizational structures require increased plasticity in a fluctuating market and unpredictable competitive business environment. Atkinson’s key belief was that being proactive and decisive, rather than reactionary, in terms of change is the difference between a successful flexible organization and a dysfunctional organization. 

In short, flexible companies can react more quickly when change happens and capitalize on new opportunities before their peers — in some cases, giving them a defensible first-mover advantage. And with change unfolding around us at a blistering pace, flexibility is even more important for companies looking to adapt to ever-evolving economic, cultural and political forces.

Between my conversations with CEOs and heads of real estate and some of the early market research I’ve seen, there seems to be an increasing desire for workspaces that are focused on employee experience, shorter leases and an emphasis on health and well-being. This seems very likely to continue well after the pandemic as companies prioritize employee safety and operational flexibility. 

And that’s not just my opinion. JLL still predicts that 30% of office space will be consumed flexibly by 2030, although it may happen “in a different form than it took before the pandemic.”  For those doing the math, that figure represents hundreds of billions of dollars in market opportunity. 

The need for an agile real estate portfolio with flexible working options will likely increase, especially once we begin to resume some semblance of normalcy. Of course, when offices do re-open on a larger scale, they will look and feel different. There will be a lot of new physical changes (temperature checks, plexiglass dividers, sanitizer stations, spaced-out desks, reduced occupancy, wayfinding signage, etc.) but also cultural and social changes. There will be a lot of experimentation and, in many cases, the role of the office itself will forever be changed.  

The new role of workspaces — at least in the immediate future — will be largely in helping facilitate in-person collaboration between colleagues, teams and organizations. Culture and camaraderie among colleagues is best supported in-person. There’s a magic and energy that happens with real, in-person, human connection. No Zoom call can replicate that. 

After a six-months-long-and-counting office sabbatical, many employees are eager to see their colleagues. But don’t expect to see office occupancy back to pre-pandemic norms for quite some time. If the grand WFH experiment has taught us anything, it’s that there’s a time and a place for certain types of work. Need to get some heads-down work knocked out? Need a quiet space to do some solo research for an upcoming project? You’re likely better off staying home. Hosting a companywide all-hands meeting or kicking off a half-day product brainstorm? Meeting with your executive team for an extended strategy session? These types of collaborations seem better suited for in-person meetings. And it’s my belief that flexibility will permeate every aspect of work.

Flexible lease terms, flexible real estate portfolios, flexible locations, flexible work schedules, flexible vacation policies, flexible furniture, layouts and much more: it’s what employees seem to want. And just as importantly, it’s what’s best for businesses: strategically, financially and culturally. A truly flexible future — Darwin would be proud.


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